Brett, Craig (2008): The effects of population aging on optimal redistributive taxes in an overlapping generations model.

PDF
MPRA_paper_8585.pdf Download (175kB)  Preview 
Abstract
The impact of population aging on the steady state solution to a OrdoverPhelps (1979) overlapping generations optimal nonlinear income tax problem with two types of workers and quasilinearinleisure preferences is investigated. A decrease in the rate of population growth, which leads to an aging population, increases the relative price of consumption per person in retirement, which tends to decrease optimal consumption for retirees of both skill types. It is also shown that the optimal steady state rate of interest equals the rate of population growth. As a result, the steady state interest rate unambiguously declines when the rate of population growth declines. The resulting adjustments in production plans has an ambiguous effect on the aggregate wage rate. This article identifies factors contributing to an increase in the aggregate wage when the population ages, namely normality of consumption in retirement, complementarity between capital and labor in production, and a large capital deepening effect relative to the increase in dependency owing to demographic change. Depending on the sign of this wage effect, ambiguities may arise in the direction of change in the optimal steady state consumption and production plans. It is also shown that the optimal marginal income tax rates are independent of the rate of population growth.
Item Type:  MPRA Paper 

Original Title:  The effects of population aging on optimal redistributive taxes in an overlapping generations model 
Language:  English 
Keywords:  optimal income taxation; overlapping generations model; population aging 
Subjects:  H  Public Economics > H2  Taxation, Subsidies, and Revenue > H21  Efficiency; Optimal Taxation D  Microeconomics > D8  Information, Knowledge, and Uncertainty > D82  Asymmetric and Private Information; Mechanism Design 
Item ID:  8585 
Depositing User:  Craig Brett 
Date Deposited:  06. May 2008 04:49 
Last Modified:  19. Feb 2013 16:37 
References:  Apps, P., Rees, R., 2006. Repeated optimal nonlinear income taxation, unpublished manuscript, University of Sydney and University of Munich. Berliant, M., Ledyard, J. O., 2005. Optimal dynamic nonlinear income taxes with no commitment, downloadable from the Working Paper Archive atW ashington University at St. Louis, http://econpapers.repec.org/paper/wpawuwppe/0403004.htm. Boadway, R., Cu, K., Marchand, M., 2000. Optimal income taxation with quasilinear preferences revisited. Journal of Public Economic Theory 2, 435460. Boadway, R., Pestieau, P., 2007. Tagging and redistributive taxation. Annales d'Economie et de Statistique 8384, 123147. Brett, C.,Weymark, J. A., 2008a. The impact of changing skill levels on optimal nonlinear income taxes. Journal of Public Economics 92, 17651771. Brett, C., Weymark, J. A., 2008b. Optimal nonlinear taxation of income and savings without commitment. Discussion paper 08W05, Vanderbilt University. Brett, C., Weymark, J. A., 2008c. Public good provision and the comparative statics of optimal nonlinear income taxation. International Economic Review 49, 255290. Cutler, D. M., Poterba, J. M., Sheiner, L. M., Summers, L. H., 1990. An aging society:Opportunity or challenge? Brookings Papers on Economic Activity 1, 156. Dillen, M., Lundholm, M., 1996. Dynamic income taxation, redistribution, and the ratchet effect. Journal of Public Economics 59, 6993. Hamilton, J., Pestieau, P., 2005. Optimal income taxation and the ability distribution:Implications for migration equilibria. International Tax and Public Finance 12, 2945. Intriligator, M. D., 1971. Mathematical Optimization and Economic Theory. PrenticeHall, Englewood Cliffs. McDaniel, S. A., 2003. Toward disentangling policy implications of economic and demographic changes in Canada's aging population. Canadian Public Policy 29, 491509. Meijdam, L., Verbon, H. A. A., 1997. Aging and public pensions in an overlapping generations model. Oxford Economic Papers 49, 2942. Mirrlees, J. A., 1971. An exploration in the theory of optimum income taxation. Review of Economic Studies 38, 175208. Myles, G. D., 1995. Public Economics. Cambridge University Press, Cambridge. Ordover, J., Phelps, E., 1979. The concept of optimal taxation in the overlapping generations model of capital and wealth. Journal of Public Economics 12, 126. Pirttilla J., Tuomala, M., 2001. On optimal nonlinear taxation and public good provision in an overlapping generations economy. Journal of Public Economics 79, 485501. Simula, L., 2007. Optimality conditions and comparative static properties of nonlinear income taxes revisited, unpublished manuscript, Paris School of Economics. Visco, I., 2001. The fiscal implications of ageing populations in OECD countries, Organization for Economic Cooperation and Development, presented at the Oxford Centreon Population Ageing Pensions Symposium, June. Weymark, J. A., 1986. A reducedform optimal nonlinear income tax problem. Journal of Public Economics 30, 199217. Weymark, J. A., 1987. Comparative static properties of optimal nonlinear income taxes. Econometrica 55, 11651185. 
URI:  http://mpra.ub.unimuenchen.de/id/eprint/8585 