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  3. American Economic Journal: Macroeconomics
  4. April 2015
  5. Optimal Mirrleesean Taxation in a Ben-Porath Economy

Optimal Mirrleesean Taxation in a Ben-Porath Economy

  • Marek Kapička
American Economic Journal: Macroeconomics
vol. 7, no. 2, April 2015
(pp. 219-48)
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Abstract

I characterize optimal taxes in a life-cycle economy where ability and human capital are unobservable. I show that unobservable human capital effectively makes preferences over labor nonseparable across age. I generalize the static optimal tax formulas to account for such nonseparabilities and show how they depend both on own-Frisch labor elasticities and cross-Frisch labor elasticities. I calibrate the economy to US data. I find that the optimal marginal income taxes decrease with age, in contrast to both the US tax code and to a model with observable human capital. I demonstrate that the behavior of cross Frisch elasticities is essential in explaining the decline. (JEL D91, H21, H24, J24)

Citation

Kapička, Marek. 2015. "Optimal Mirrleesean Taxation in a Ben-Porath Economy." American Economic Journal: Macroeconomics, 7 (2): 219-48. DOI: 10.1257/mac.20110110

Additional Materials

JEL Classification

  • D15 Intertemporal Household Choice; Life Cycle Models and Saving
  • H21 Taxation and Subsidies: Efficiency; Optimal Taxation
  • H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
  • J24 Human Capital; Skills; Occupational Choice; Labor Productivity
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