Optimal Dynamic Taxes

55 Pages Posted: 3 Dec 2011 Last revised: 17 Mar 2023

See all articles by Mikhail Golosov

Mikhail Golosov

Princeton University - Department of Economics

Maxim Troshkin

Yale University, Department of Economics

Aleh Tsyvinski

Yale University - Cowles Foundation; Yale University

Date Written: December 2011

Abstract

We study optimal labor and savings distortions in a lifecycle model with idiosyncratic shocks. We show a tight connection between its recursive formulation and a static Mirrlees model with two goods, which allows us to derive elasticity-based expressions for the dynamic optimal distortions. We derive a generalization of a savings distortion for non-separable preferences and show that, under certain conditions, the labor wedge tends to zero for sufficiently high skills. We estimate skill distributions using individual data on the U.S. taxes and labor incomes. Computed optimal distortions decrease for sufficiently high incomes and increase with age.

Suggested Citation

Golosov, Mikhail and Troshkin, Maxim and Tsyvinski, Aleh and Tsyvinski, Aleh, Optimal Dynamic Taxes (December 2011). NBER Working Paper No. w17642, Available at SSRN: https://ssrn.com/abstract=1967376

Mikhail Golosov (Contact Author)

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ 08544-1021
United States

Maxim Troshkin

Yale University, Department of Economics ( email )

493 College St
New Haven, CT CT 06520
United States

HOME PAGE: http://www.troshkin.com

Aleh Tsyvinski

Yale University - Cowles Foundation ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-9163 (Phone)

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

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