Should Tax Rates Decline with Age?

14 Pages Posted: 29 Mar 2011 Last revised: 17 Apr 2011

Date Written: March 20, 2011

Abstract

For nearly a century, economists have recognized that it is “advantageous to...tax most the source of supply which is least elastic.” But although the “inverse elasticity rule” is now a basic tenet of public economics, it rarely yields practicable prescriptions for tax policy. For example, the inverse elasticity rule would suggest that marginal tax rates should decrease as income increases, as taxes are more likely to disincentivize labor for high-income individuals than for low- and moderate-income individuals. However, such a policy may not be politically feasible - or normatively desirable - on account of its regressive implications.

Still, there is one segment of the workforce whose labor supply is highly price-elastic and whose relative tax rates might be lowered without triggering the political concerns and distributive qualms mentioned above: older workers. By one estimate, the price elasticity of labor supply - the percentage increase in hours worked for every one percent increase in after-tax income - is approximately three times as high for sixty-year-olds as it is for forty-year-olds. Other estimates indicate an even more dramatic increase in labor supply elasticity over age. Thus, the deadweight loss per dollar raised from income taxation is much larger for taxes imposed on older Americans than for taxes imposed on prime-age workers. Congress could raise the same amount of revenue while generating less deadweight loss if it increased rates on prime-age workers and lowered rates on older ones.

This Comment evaluates age-adjusted tax rates from the perspectives of economic efficiency, distributive equity, and political feasibility. It presents the first sustained case from a law-and-economics perspective for reducing income tax rates on individuals as they enter old age. It also explains how age-sensitive tax rates can be consistent with distributive equity objectives. Finally, it shows the importance of reconciling optimal taxation theory with political reality and constitutional law. Until now, tax theorists have largely derived optimal tax rules without reference to political and constitutional constraints. By incorporating political considerations into the optimal tax calculus, economists and tax law scholars can generate policy prescriptions that not only are efficient in theory but also stand a chance at implementation.

Keywords: taxes, age-adjusted taxes, optimal taxation theory

JEL Classification: H20, H21, H23, H24

Suggested Citation

Hemel, Daniel Jacob, Should Tax Rates Decline with Age? (March 20, 2011). Yale Law Journal, Vol. 120, p. 102, 2011, Available at SSRN: https://ssrn.com/abstract=1791006

Daniel Jacob Hemel (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

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