Optimal progressivity with age-dependent taxation

Jonathan Heathcote, Kjetil Storesletten, Giovanni L. Violante

Research output: Contribution to journalArticle

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

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

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

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