Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2003:7: Age Related Optimal Income Taxation

Sören Blomquist () and Luca Micheletto ()
Additional contact information
Sören Blomquist: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Luca Micheletto: Istituto di Economia Politica, Postal: Università L. Bocconi, via U. Gobbi 5, 20136 Milano, Italy

Abstract: The focus of the present paper is on the intragenerational effects of nonlinear income taxation in a multiperiod framework. We investigate whether it is possible to achieve redistribution at smaller efficiency costs by enlarging the message space adopted in standard tax system (which only includes reported income) to consider also the age of taxpayers. Since it would be awkward to analyze an age related tax without taking into account the time-dimension, we use an intertemporal extension of the Stiglitz-Stern (1982, 1982) discrete adaptation of the Mirrlees (1971) optimal income taxation model. In the simplest version of the model we neglect the possibility of savings. This case can be interpreted as a situation with extreme liquidity constraints. It is shown that switching to an age related tax system opens the way for a Pareto improving tax reform entailing a cut in marginal tax rates for young agents. In a second version of the model we retain the possibility of savings and, assuming that the policy maker can tax interest incomes on a linear scale, we also analyze the optimal values of the interest income tax rate for the age dependent and the age independent tax systems.

Keywords: Optimal taxation; age specific taxes; tagging

JEL-codes: H21; H23; H24

54 pages, February 7, 2003

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