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Title:Optimal taxation with current and future cohorts PDF Logo
Authors:Fehr, Hans
Kindermann, Fabian
Issue Date:2012
Series/Report no.:CESifo Working Paper: Public Finance 3973
Abstract:This note demonstrates that optimal tax calculations in overlapping generations models should not be based exclusively on long-run welfare changes. As the latter represent a mix of efficiency and intergenerational redistribution effects, they typically favor policies which redistribute towards future cohorts. Taking the recent study of Conesa et al. (2009) as an example, we explicitly consider short- and long-run welfare effects and isolate the aggregate efficiency consequences of a tax reform. Based on this aggregate efficiency measure, we find a much lower capital income tax rate and a significantly less progressive labor income tax schedule than Conesa et al. (2009) to be optimal. As we demonstrate, the optimality of capital income taxation is explained by the low interest elasticity of precautionary savings compared to that of life-cycle savings.
Subjects:stochastic OLG model
precautionary savings
intragenerational risk sharing and redistribution
JEL:C68
H21
D91
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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