The author studies age-dependent optimal taxation in an environment that takes into consideration changes in consumption behavior over the life cycle due to changes in labor income paths and borrowing limits. Income mobility is defined as an exogenous rate at which individuals change from a low-to a high-income path. In this framework, the role of age-dependent income taxation is reinforced. Consumption and leisure optimal allocations are not constant over the life cycle even when preferences are additively separable. As a result, age-dependent optimal capital income taxation faced by high-income earners differs from zero for all forms of preferences. In addition, past environments used to study optimal taxation appear as special cases of the proposed model. When the rate of income mobility is infinite, the proposed model nests the simple finite horizon framework. When life expectancy is infinite, the model nests the infinite horizon framework.
Aghion, Philippe, Abhijit Banerjee, and Thomas Piketty.1999. Dualism and macro-economic volatility . Quarterly Journal of Economics114:1321-58.
2.
Aiyagari, Rao S.1995. Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting. Journal of Political Economy103:1158-75.
3.
Ambler, Steven.1999. Optimal time consistent fiscal policy with overlapping generations. Center for Research on Employment and Economic Fluctuations Working Paper, Montreal, Quebec, Canada.
4.
Atkeson, Andrew, Varadarajan V. Chari, and Patrick J. Kehoe .1999. Taxing capital income: A bad idea, federal reserve. Bank of Minneapolis Quarterly Review23:3-17.
5.
Atkinson, Anthony B., and Joseph E. Stiglitz .1972. The structure of indirect taxation and economic efficiency. Journal of Public Economics1:97-120.
6.
Atkinson, Anthony B., and Joseph E. Stiglitz .1980. Lectures on public economics . New York: McGraw-Hill.
7.
Benveniste, Laurence M., and Jose A. Sheinkman .1979. On the differentiability of the value function in dynamic models of economics. Econometrica47:727-32.
8.
Blanchard, Olivier.1985. Deficits, debt and finite horizons. Journal of Political Economy93:223-47.
9.
Caliendo, Frank N., and Emin Gahramanov .2007. Hunting the unobservables for social security: A general equilibrium approach. Public Finance Review37:470-502.
10.
Calvo, Guillermo A., and Maurice Obstfeld .1988. Optimal time consistent fiscal policy with finite lifetimes. Econometrica56:411-32.
11.
Chamley, Christophe P.1985. Efficient taxation in a stylized model of intertemporal general equilibrium. International Economic Review26:451-68.
12.
Chamley, Christophe P.1986. Optimal taxation of income in general equilibrium with infinite lives. Econometrica54:607-22.
13.
Chamley, Christophe P.2001. Capital income taxation, wealth distribution and borrowing constraints. Journal of Public Economics79:55-69.
14.
Conesa, JuanCarlos, Sagiri Kitao, and Dirk Krueger.2009. Taxing capital? Not a bad idea after all!American Economic Review99:25-48.
15.
Crook, Jonathan, and Stefan Hochguertel .2007. US and European household debt and credit constraints. Timbergen Institute Discussion Paper, Amsterdam, the Netherlands.
16.
Erosa, Andre, and Martin Gervais.2002. Optimal taxation in life-cycle economies . Journal of Economic Theory105:338-69.
17.
Fullerton, Don, and Diane Lim Rogers .1991. Lifetime vs. annual perspective on tax incidence. National Tax Journal44:277-87.
18.
Garriga, Carlos.2003. Optimal fiscal policy in overlapping generations models. Working Paper, Florida State University and Center for Research in Welfare Economics, Barcelona, Spain.
19.
Gertler, Mark1997. Government debt and social security in a life-cycle economy . National Bureau of Economic Research Working Papers, Cambridge, MA.
20.
Gist, John, and Carlos Figueiredo .2006. In their dreams: What will boomers inherit?AARP Public Policy Institute Working Paper , Washington, DC.
21.
Gourinchas, Pierre-O., and Jonathan Parker .2002. Consumption over the life-cycle . Econometrica70:47-89.
22.
Judd, Kenneth L.1987. The welfare cost of factor taxation in a simple perfect foresight model. Journal of Political Economy95:675-709.
23.
Judd, Kenneth L.1985. Redistributive taxation in a simple perfect foresight model. Journal of Public Economics28:59-84.
24.
Mathieu-Bolh, Nathalie.2006. Optimal taxation and finite horizon. Economics Letters91:215-21.
25.
Mathieu-Bolh, Nathalie.2010a. Optimal taxation and borrowing constraints. Manuscript, University of Vermont, Burlington.
Saez, Emmanuel.2002. The desirability of commodity taxation under non-linear income taxation and heterogeneous tastes. Journal of Public Economics83:217-30.
28.
Yaari, Menahem E.1965. Uncertain lifetime, life insurance, and the theory of the consumer. Review of Economic Studies32:137-50.
