The Welfare Gains of Age Related Optimal Income Taxation

CONPUBBLICA Working Paper Series No. 151

49 Pages Posted: 4 Mar 2012

See all articles by Spencer Bastani

Spencer Bastani

IFAU - Institute for Labour Market Policy Evaluation; Uppsala University - Department of Economics; Research Institute of Industrial Economics (IFN); Uppsala University - Uppsala Center for Fiscal Studies; Uppsala Center for Labor Studies and Department of Economics

Soren Blomquist

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

Luca Micheletto

Bocconi University

Multiple version iconThere are 2 versions of this paper

Date Written: October 2010

Abstract

Using a calibrated overlapping generations model we quantify the welfare gains of an age dependent income tax. Agents face uncertainty regarding future abilities and can by saving transfer consumption across periods. The welfare gain of switching from an age-independent to an age-dependent nonlinear tax amounts in our benchmark model to around three percent of GDP. The gains are particularly high when there are restrictions on debt policy. The gains of using a nonlinear - as opposed to a linear tax are even larger. Surprisingly, it is of secondary importance to optimally choose the tax on interest income.

Keywords: labor income taxation, capital income taxation, age-dependent taxes, OLG model

JEL Classification: H21, H23, H24

Suggested Citation

Bastani, Spencer and Blomquist, Soren and Micheletto, Luca, The Welfare Gains of Age Related Optimal Income Taxation (October 2010). CONPUBBLICA Working Paper Series No. 151, Available at SSRN: https://ssrn.com/abstract=2014641 or http://dx.doi.org/10.2139/ssrn.2014641

Spencer Bastani (Contact Author)

IFAU - Institute for Labour Market Policy Evaluation ( email )

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Uppsala University - Department of Economics ( email )

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SE-75120 Uppsala
Sweden

Research Institute of Industrial Economics (IFN) ( email )

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Uppsala University - Uppsala Center for Fiscal Studies ( email )

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Uppsala Center for Labor Studies and Department of Economics ( email )

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)

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Luca Micheletto

Bocconi University ( email )

Via Sarfatti 25
20136 Milan, MI 20136
Italy