Optimal Progressivity with Age-Dependent Taxation

82 Pages Posted: 7 Mar 2019

See all articles by Jonathan Heathcote

Jonathan Heathcote

Minneapolis Fed

Kjetil Storesletten

University of Oslo - Department of Economics; Centre for Economic Policy Research (CEPR)

Gianluca Violante

Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: February 2019

Abstract

This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex-ante heterogeneity in the disutility of work and the cost of skill acquisition, partially insurable wage risk, and a life cycle productivity profile. An analytically tractable version of the model without intertemporal trade is used to characterize and quantify the salient trade-offs in tax design. The key results are that progressivity should be U-shaped in age and that the average marginal tax rate should be increasing and concave in age. These findings are confirmed in a version of the model with borrowing and saving that we solve numerically.

Keywords: income distribution, incomplete markets, Labor Supply, Life Cycle, Skill investment, Tax progressivity

JEL Classification: D30, E20, H20, H40, J22, J24

Suggested Citation

Heathcote, Jonathan and Storesletten, Kjetil and Violante, Gianluca, Optimal Progressivity with Age-Dependent Taxation (February 2019). CEPR Discussion Paper No. DP13550. Available at SSRN: https://ssrn.com/abstract=3346339

Jonathan Heathcote (Contact Author)

Minneapolis Fed ( email )

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Kjetil Storesletten

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+47 2284 4009 (Phone)
+47 2285 5035 (Fax)

HOME PAGE: http://folk.uio.no/kjstore/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gianluca Violante

Princeton University ( email )

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