Optimal progressivity with age-dependent taxation

Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante

doi:10.1016/j.jpubeco.2019.104074

Optimal progressivity with age-dependent taxation

Jonathan Heathcote
, Kjetil Storesletten
, Giovanni L. Violante

Research output: Contribution to journal › Article › peer-review

22 Scopus citations

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 language	English (US)
Article number	104074
Journal	Journal of Public Economics
Volume	189
DOIs	https://doi.org/10.1016/j.jpubeco.2019.104074
State	Published - Sep 2020
Externally published	Yes

Bibliographical note

Funding Information:
The first draft was prepared for the conference “New Perspectives on Consumption Measures.” We are grateful to Ricardo Cioffi for outstanding research assistance. We thank Andrés Erosa, Mark Huggett, Axelle Ferriere, Guy Laroque, Magne Mogstad, Facundo Piguillem, Nicola Pavoni, various seminar participants, and two anonymous referees for comments. Kjetil Storesletten acknowledges support from the European Research Council (ERC Advanced Grant IPCDP-324085 ), as well as from Oslo Fiscal Studies . The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

Publisher Copyright:
© 2020 Elsevier B.V.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 1 No Poverty
SDG 10 Reduced Inequalities

Keywords

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

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10.1016/j.jpubeco.2019.104074

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title = "Optimal progressivity with age-dependent taxation",

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.",

keywords = "Income distribution, Labor supply, Life cycle, Skill iInvestment, Skill investment, Tax progressivity",

author = "Jonathan Heathcote and Kjetil Storesletten and Violante, \{Giovanni L.\}",

note = "Funding Information: The first draft was prepared for the conference “New Perspectives on Consumption Measures.” We are grateful to Ricardo Cioffi for outstanding research assistance. We thank Andr{\'e}s Erosa, Mark Huggett, Axelle Ferriere, Guy Laroque, Magne Mogstad, Facundo Piguillem, Nicola Pavoni, various seminar participants, and two anonymous referees for comments. Kjetil Storesletten acknowledges support from the European Research Council (ERC Advanced Grant IPCDP-324085 ), as well as from Oslo Fiscal Studies . The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Publisher Copyright: {\textcopyright} 2020 Elsevier B.V.",

year = "2020",

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doi = "10.1016/j.jpubeco.2019.104074",

language = "English (US)",

volume = "189",

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AU - Heathcote, Jonathan

AU - Storesletten, Kjetil

AU - Violante, Giovanni L.

N1 - Funding Information: The first draft was prepared for the conference “New Perspectives on Consumption Measures.” We are grateful to Ricardo Cioffi for outstanding research assistance. We thank Andrés Erosa, Mark Huggett, Axelle Ferriere, Guy Laroque, Magne Mogstad, Facundo Piguillem, Nicola Pavoni, various seminar participants, and two anonymous referees for comments. Kjetil Storesletten acknowledges support from the European Research Council (ERC Advanced Grant IPCDP-324085 ), as well as from Oslo Fiscal Studies . The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Publisher Copyright: © 2020 Elsevier B.V.

PY - 2020/9

Y1 - 2020/9

N2 - 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.

AB - 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.

KW - Income distribution

KW - Labor supply

KW - Life cycle

KW - Skill iInvestment

KW - Skill investment

KW - Tax progressivity

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JO - Journal of Public Economics

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ER -

Optimal progressivity with age-dependent taxation

Abstract

Bibliographical note

UN SDGs

Keywords

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