Optimal age-dependent income taxation in a dynamic extensive model: The case for negative participation tax on young people

Takao Kataoka, Yoshihiro Takamatsu

Research output: Contribution to journalArticle

Abstract

We consider optimal age-dependent income taxation in a dynamic model where the labor-leisure choice is the extensive margin, each household faces idiosyncratic shocks to labor productivity and a pecuniary cost to work, and there is no insurance market against the shocks. We show that the well-known property of the optimal participation tax rate in the static model continues to hold in our dynamic economy, that is, the participation tax rates for some income groups with low consumption are likely negative. In dynamic models, the optimal participation tax rate depends on age and on labor income. Our numerical simulations suggest that a negative participation tax should be restricted to young households.

Original languageEnglish
JournalJournal of Public Economic Theory
DOIs
Publication statusAccepted/In press - 2019

ASJC Scopus subject areas

  • Finance
  • Sociology and Political Science
  • Economics and Econometrics

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