Working Paper: CEPR ID: DP16254
Authors: Christian Hellwig
Abstract: Abstract I analyze dynamic Mirrlees taxation with preferences that are non-separable between consumption, leisure and type, which determines both ability and consumption needs. I show how to account for non-separable preferences through a simple change in probability measures. I generalize the existing Inverse Euler Equation and optimal static labor tax formulae and provide a unified intuition based on a set of perturbations around the optimal allocations that preserve expected utility and incentive compatibility. Non-separability in preferences gives rise to a new tradeoff between current and future redistribution that is internalized by the planner's solution but not by private savings decisions. This leads to a novel rationale to subsidize (tax) savings and make labor taxes more (less) persistent, when more productive agents also have higher (lower) consumption needs.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonseparability in preferences (D10) | tradeoff between current and future redistribution (D15) |
| higher consumption needs of more productive agents (E20) | rationale for subsidizing tax savings (H20) |
| higher consumption needs of more productive agents (E20) | adjusting labor taxes' persistence (H31) |
| alignment of consumption needs with ability-based redistribution motives (D16) | optimal savings taxes or subsidies (H21) |
| low-ability types having higher consumption needs (D11) | optimal to tax savings (H21) |
| opposite holds (higher ability types having higher consumption needs) (D11) | savings should be subsidized (D14) |