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Optimal taxation in life-cycle economics

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

Record type: Article

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.

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Published date: August 2002
Keywords: optimal taxation, uniform taxation, life cycle

Identifiers

Local EPrints ID: 47643
URI: http://eprints.soton.ac.uk/id/eprint/47643
ISSN: 0022-0531
PURE UUID: b5669189-8c63-46ca-bee9-f669ea33f683

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Date deposited: 07 Aug 2007
Last modified: 17 Jul 2017 15:03

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Contributors

Author: Andrés Erosa
Author: Martin Gervais

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