Optimal progressivity with age-dependent taxation

Jonathan Heathcote, Kjetil Storesletten, Giovanni L. Violante

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Article number104074
JournalJournal of Public Economics
Volume189
DOIs
StatePublished - Sep 2020
Externally publishedYes

Bibliographical note

Funding Information:
The first draft was prepared for the conference “New Perspectives on Consumption Measures.” We are grateful to Ricardo Cioffi for outstanding research assistance. We thank Andrés Erosa, Mark Huggett, Axelle Ferriere, Guy Laroque, Magne Mogstad, Facundo Piguillem, Nicola Pavoni, various seminar participants, and two anonymous referees for comments. Kjetil Storesletten acknowledges support from the European Research Council (ERC Advanced Grant IPCDP-324085 ), as well as from Oslo Fiscal Studies . The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

Publisher Copyright:
© 2020 Elsevier B.V.

Keywords

  • Income distribution
  • Labor supply
  • Life cycle
  • Skill iInvestment
  • Skill investment
  • Tax progressivity

Fingerprint

Dive into the research topics of 'Optimal progressivity with age-dependent taxation'. Together they form a unique fingerprint.

Cite this