Optimal taxation in life-cycle economics


Erosa, Andrés and Gervais, Martin (2002) Optimal taxation in life-cycle economics. Journal of Economic Theory, 105, (2), 338-369. (doi:10.1006/jeth.2001.2877).

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Original Publication URL: http://dx.doi.org/10.1006/jeth.2001.2877

Description/Abstract

We use a very standard life-cycle growth model, in which individuals have a labor-leisure choice in each period of their lives, to prove that an optimizing government will almost always find it optimal to tax or subsidize interest income. The intuition for our result is straightforward. In a life-cycle model the individual's optimal consumption–work plan is almost never constant and an optimizing government almost always taxes consumption goods and labor earnings at different rates over an individual's lifetime. One way to achieve this goal is to use capital and labor income taxes that vary with age. If tax rates cannot be conditioned on age, a nonzero tax on capital income is also optimal, as it can (imperfectly) mimic age-conditioned consumption and labor income tax rates.

Item Type: Article
ISSNs: 0022-0531 (print)
Related URLs:
Keywords: optimal taxation, uniform taxation, life cycle
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HJ Public Finance
Divisions: University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 47643
Date Deposited: 07 Aug 2007
Last Modified: 27 Mar 2014 18:31
URI: http://eprints.soton.ac.uk/id/eprint/47643

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