The Welfare Gains of Age‐Related Optimal Income Taxation

31 Pages Posted: 15 Nov 2013

See all articles by Spencer Bastani

Spencer Bastani

IFAU - Institute for Labour Market Policy Evaluation; Linnaeus University - Department of Economics and Statistics; Research Institute of Industrial Economics (IFN)

Soren Blomquist

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Luca Micheletto

University of Milan

Multiple version iconThere are 3 versions of this paper

Date Written: November 2013

Abstract

Using an overlapping generations model with skill uncertainty and private savings, we quantify the gains of age‐dependent labor income taxation. The total steady‐state welfare gain of switching from age‐independent to age‐dependent nonlinear taxation varies between 2.4% and 4% of GDP. Part of the gain descends from relaxing incentive–compatibility constraints and part is due to capital‐accumulation effects. The welfare gain is of about the same magnitude as that which can be achieved by moving from linear to nonlinear income taxation. Finally, the welfare loss from tax‐exempting interest income is negligible under an optimal age‐dependent labor income tax.

Suggested Citation

Bastani, Spencer and Blomquist, Soren and Micheletto, Luca, The Welfare Gains of Age‐Related Optimal Income Taxation (November 2013). International Economic Review, Vol. 54, Issue 4, pp. 1219-1249, 2013, Available at SSRN: https://ssrn.com/abstract=2354710 or http://dx.doi.org/10.1111/iere.12034

Spencer Bastani (Contact Author)

IFAU - Institute for Labour Market Policy Evaluation ( email )

Box 513
751 20 Uppsala
Sweden

Linnaeus University - Department of Economics and Statistics ( email )

Växjö, 351 06
Sweden

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Soren Blomquist

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden
+46 18 471 1102 (Phone)
+46 18 471 1478 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Luca Micheletto

University of Milan ( email )

Via Festa del Perdono, 7
Milan, 20122
Italy

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