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)
"Optimal Mirrleesean Taxation in a Ben-Porath Economy."
American Economic Journal: Macroeconomics,
Intertemporal Household Choice; Life Cycle Models and Saving
Taxation and Subsidies: Efficiency; Optimal Taxation
Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
Human Capital; Skills; Occupational Choice; Labor Productivity