Intertemporal Aspects of Optimal Income Taxation

Massachusetts Institute Of Technology, Cambridge MA

Investigators

Abstract

There is considerable variation around the world in the relative taxation of capital income and labor income. And there are proposals to tax consumer expenditures as a method of integrating taxation of labor and capital incomes. Moreover there is considerable academic debate as to how different sources of income should be taxed. Similarly, there is considerable variation around the world in the formulas used to determine benefits for retirees in social security systems. And there is ongoing research on the advantages of different designs. This project looks in an integrated way at these two issues, examining in detail the arguments that support different conclusions on both taxation and benefit design, benefiting thereby by drawing on two different academic literatures and two different sets of country experiences. In particular, it is common for benefit rules to be different for people with different dates of birth, but income tax rules are based primarily on annual income with very little attention to the age of the tax filer. Thus one goal of this project is to examine whether the type of variation present in benefit rules would be sufficiently beneficial in tax design to warrant the increased complexity that would come with several different tax rate structures. Greater insight into how the advantages of different approaches vary with the economic environment should aid the development of better policies. And this insight should be a stimulus to empirical research by identifying the elements in the economic environment that are particularly important for the design of taxes. In this way this project will have broader impacts on government policy.