Working Paper: NBER ID: w17642
Authors: Mikhail Golosov; Maxim Troshkin; Aleh Tsyvinski
Abstract: We study optimal labor and savings distortions in a lifecycle model with idiosyncratic shocks. We show a tight connection between its recursive formulation and a static Mirrlees model with two goods, which allows us to derive elasticity-based expressions for the dynamic optimal distortions. We derive a generalization of a savings distortion for non-separable preferences and show that, under certain conditions, the labor wedge tends to zero for sufficiently high skills. We estimate skill distributions using individual data on the U.S. taxes and labor incomes. Computed optimal distortions decrease for sufficiently high incomes and increase with age.
Keywords: optimal taxation; dynamic taxation; labor wedges; savings distortions; skill distribution
JEL Codes: E62; H21; H24; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high-skilled individuals (J24) | labor wedge tends to zero (J39) |
| dynamic incentives (O31) | labor taxation (J89) |
| age-dependent optimal distortions (H21) | labor distortions (J89) |
| labor income (J39) | optimal savings distortion (H21) |