Journal Article

The Surprising Power of Age-Dependent Taxes

Matthew Weinzierl

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 78, issue 4, pages 1490-1518
Published in print October 2011 | ISSN: 0034-6527
Published online April 2011 | e-ISSN: 1467-937X | DOI:
The Surprising Power of Age-Dependent Taxes

Show Summary Details


This paper provides a new, empirically driven application of the dynamic Mirrleesian framework by studying a feasible and potentially powerful tax reform: age-dependent labour income taxation. I show analytically how age dependence improves policy on both the intratemporal and intertemporal margins. I use detailed numerical simulations, calibrated with data from the U.S. Panel Study of Income Dynamics, to generate robust policy implications: age dependence (1) lowers marginal taxes on average and especially on high-income young workers and (2) lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted. Finally, I calculate and characterize the welfare gains from age dependence. Despite its simplicity, age dependence generates a welfare gain equal to between 0·6% and 1·5% of aggregate annual consumption, and it captures more than 60% of the gain from reform to the dynamic optimal policy. The gains are due to substantial increases in both efficiency and equity. When age dependence is restricted to be Pareto improving, the welfare gain is nearly as large.

Keywords: Dynamic optimal taxation; Tagging; Age dependence; H20; H21

Journal Article.  13476 words.  Illustrated.

Subjects: Taxation, Subsidies, and Revenue

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.