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International Tax and Public Finance

, Volume 25, Issue 3, pp 631–653 | Cite as

On the optimal lifetime redistribution and social objectives: a multidimensional approach

  • Terhi Ravaska
  • Sanna Tenhunen
  • Matti Tuomala
Article
  • 139 Downloads

Abstract

We characterize optimal redistribution policy when there are differences not only in individuals’ productivities but also in their tastes towards the timing of consumption, i.e. some are patient and others impatient in consumption over the life cycle and this preference together with productivity is non-observable to government. We consider different social objectives and incorporate a novel approach taken in the spirit of Roemer (Equality of opportunity, Harvard University Press, Harvard, 1998) and Van de Gaer (Equality of opportunity and investments in human capital, Katholieke Universiteit Leuven, 1993). This approach applies a compromise between the principle of compensation and the principle of responsibility. We derive analytical expressions which describe the optimal distortion (upward or downward) in saving. As the multidimensional problems become very complicated, to gain a better understanding, we also numerically examine the properties of an optimal lifetime redistribution policy. We find support for a nonlinear tax/pension program in which impatient types are taxed at the margin, and patient low ability types are subsidized in their retirement consumption. Numerical simulations show quite big differences in terms of the levels of marginal tax rates between different social objectives, indicating that the optimal income taxation results are sensitive to the choice of the social planner’s goals.

Keywords

Optimal taxation Lifetime redistribution Heterogeneous time preferences 

JEL Classification

H21 H55 D71 

Notes

Acknowledgements

We would like to thank two anonymous referees for valuable comments. We also thank the seminar audiences at the 34th Summer Seminar of Finnish Economists, the XXXVII Annual Meeting of the Finnish Economic Association, the 71st Annual Congress of the International Institute of Public Finance in Dublin and the Nordic workshop on tax policy and public economics in Oslo for the discussion.

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Copyright information

© Springer Science+Business Media, LLC 2017

Authors and Affiliations

  1. 1.University of TampereTampereFinland
  2. 2.Finnish Centre for PensionsHelsinkiFinland

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