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on Public Finance |
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Issue of 2007‒03‒17
two papers chosen by |
| By: | Bovenberg,Lans; Sorensen,Peter Birch (Tilburg University, Center for Economic Research) |
| Abstract: | Advances in information technology have improved the administrative feasibility of redistribution based on lifetime earnings recorded at the time of retirement. We study optimal lifetime income taxation and social insurance in an economy in which redistributive taxation and social insurance serve to insure (ex ante) against skill heterogeneity as well as disability risk. Optimal disability benefits rise with previous earnings so that public transfers depend not only on current earnings but also on earnings in the past. Hence, lifetime taxation rather than annual taxation is optimal. The optimal tax-transfer system does not provide full disability insurance. By offering imperfect insurance and structuring disability benefits so as to enable workers to insure against disability by working harder, social insurance is designed to offset the distortionary impact of the redistributive labor income tax on labor supply. |
| Keywords: | optimal lifetime income taxation;optimal social insurance |
| JEL: | H21 H55 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200714&r=pub |
| By: | Juan Carlos Conesa (Universitat Autonoma de Barcelona); Sagiri Kitao (New York University); Dirk Krueger (University of Frankfurt, CEPR, CFS and NBER) |
| Abstract: | In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that the optimal capital income tax rate is not only positive, but is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about $6,000 (relative to an average income of households in the model of $35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system. |
| Keywords: | Progressive Taxation, Capital Taxation, Optimal Taxation |
| JEL: | E62 H21 H24 |
| Date: | 2006–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200621&r=pub |