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.
- J22 - Time Allocation and Labor Supply
- J24 - Human Capital; Skills; Occupational Choice; Labor Productivity
- E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data)
- H20 - Taxation, Subsidies, and Revenue: General
- D30 - Distribution: General
- H40 - Publicly Provided Goods: General
- Federal Reserve Bank of Minneapolis. Research Department
- Federal Reserve Bank of Minneapolis
- Dans Collection:
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