Discussion Paper 0905, "On the Optimality of Age-Dependent Taxes and the Progressive U.S. Tax System", by Martin Gervais
In life-cycle economies, where an individual\'s optimal consumption-work plan is almost never constant, the optimal marginal tax rates on capital and labor income vary with age. Conversely, the progressivity imbedded in the U.S. tax code implies that marginal tax rates vary with age because tax rates vary with earnings and earnings vary with age. Using numerical simulations, this paper shows that if the tax authority is prevented from conditioning tax rates on age, some degree of progressivity is desirable as progressive taxation better imitates optimal age-dependent taxes than an optimal age-independent tax system. This role for progressive taxation emanates from efficiency reasons and does not rely on any insurance nor re-distribution arguments.
Keywords: Progressive Taxation, Optimal Taxation, Life-Cycle
JEL Classification: E62, H21