Simulating Fundamental Tax Reform in the United States

Altig, David; Auerbach, Alan J.; Kotlikoff, Laurence J.; Smetters, Kent; Walliser, Jan

doi:10.1257/aer.91.3.574

Cited by 370 publications

(227 citation statements)

References 17 publications

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“…Figure 2 presents the empirically observed productivity profile and the estimated polynomials for the different regions. Our coefficients for the "young" countries 18 and the shape of the wage profile are in line with others reported in the literature, especially with those obtained by Hansen (1993) and Altig et al (2001). The estimate of δ h of 1.4% for developing and 0.9% for developed countries is in a reasonable range (Arrazola and de Hevia (2004), Browning, Hansen, and Heckman (1999)), and the estimate of ψ ≈ 0.60 is also in the middle of the range reported in Browning, Hansen, and Heckman (1999).…”

Section: Individual Productivity and Labor Supplysupporting

confidence: 90%

Aging and pension reform: extending the retirement age and human capital formation

Vögel

Ludwig

Börsch‐Supan

2015

Journal of Pension Economics and Finance

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Projected demographic changes in industrialized countries will reduce the share of the working-age population. Analyses based on standard OLG models predict that these changes will increase the capitallabor ratio. Hence, rates of return to capital decrease and wages increase with adverse welfare consequences for current middle aged asset rich agents. This paper addresses three important adjustments channels to dampen these detrimental effects of demographic change: investing abroad, endogenous human capital formation and increasing the retirement age. Our quantitative finding is that openness has a relatively mild effect. In contrast, endogenous human capital formation in combination with an increase in the retirement age has strong effects. Under these adjustments maximum welfare losses of demographic change for households alive in 2010 are reduced by about 3 percentage points. Nontechnical SummaryThe world will experience major changes in its demographic structure in the next decades. In all countries, this process is driven by increasing life expectancy and a decline in birth rates. In consequence, the fraction of the population in working-age will decrease and the fraction of people in old-age will increase. This process is already well under way in industrial countries.Standard economic analyses predict that these demographic processes will increase the capitallabor ratio. Hence, rates of return to capital decrease and wages increase, which has adverse welfare consequences for current cohorts who will be retired when the rate of return on assets is low.The purpose of this paper is to ask how strongly three channels of adjustment to these ongoing developments and their interactions dampen such adverse welfare effects. First, compared to industrialized countries, developing countries are relatively young. In autarky, rates of return to capital in these economies are therefore higher. From the perspective of industrialized countries, investing capital abroad may therefore stabilize the return to capital. Second, as raw labor will become a relatively scarce factor and as life expectancy increases, strong incentives to invest in human capital emanate. Such endogenous human capital adjustments may thereby substantially mitigate the effects of aging on macroeconomic aggregates and individual welfare. Third, while human capital adjustment increases the quality of the factor labor, a pension reform through increasing the retirement age will increase the quantity of labor. This will increase per capita productivity further. In addition to this direct effect, increasing the retirement age will also extend the worklife planning horizon of households. This amplifies the incentives to accumulate human capital.We quantitatively evaluate these adjustment channels by developing an Auerbach and Kotlikoff (1987) overlapping generations (OLG) model with a realistic demographic transition, two integrated world regions, endogenous labor supply decisions and endogenous human capital formation. As the central part of our ...

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Section: Individual Productivity and Labor Supplysupporting

confidence: 90%

Aging and pension reform: extending the retirement age and human capital formation

Vögel

Ludwig

Börsch‐Supan

2015

Journal of Pension Economics and Finance

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“…Ho and Stiroh (1998), Dunbar and Pogue (1998), and Ventura (1999) show for the US that high income households are relieved, whereas especially middle income households are burdened by a flat tax reform. Altig et al (2001) conclude that the lowest income households lose through a flat tax.…”

Section: Economic Effects Of Flat Tax Reforms In the Literaturementioning

confidence: 91%

Is a flat tax reform feasible in a grown-up democracy of Western Europe? A simulation study for Germany

Fuest

Peichl

Schaefer

2008

Int Tax Public Finance

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“…They face random lives and some live through the maximum possible age 2T: Conditional on survival, an individual's lifetime support overlaps during the …rst T periods with the lifetime support of his parent, and during the last T periods with the lifetime support of his children. 3 At any point in time, the economy is populated by 2T overlapping generations of individuals with total measure one.…”

Section: Demographics and Endowmentsmentioning

confidence: 99%

“…These resources are transferred in a lump-sum fashion to the entire population. 3 It will become clear in the next section that the di¤erence between a dynastic model and a pure-life cycle model will be in the way preferences are structured. In the dynastic model, since parents and children care about each other, there are altruistic transfers between them as well as bequests.…”

Section: Demographics and Endowmentsmentioning

confidence: 99%

Altruism, incomplete markets, and tax reform

Fuster

İmrohoroğlu

2008

Journal of Monetary Economics

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We compute the welfare e¤ects of di¤erent revenue-neutral tax reforms that eliminate capital income taxation in a general equilibrium model calibrated to the U.S. economy. We …nd that the reform with the largest welfare gain is the one that eliminates all income taxation and increases the consumption tax to 35%. In our calibrated dynastic economy, 75% of the population alive at the time of the reform bene…t from it. Altruism plays an important role in this result. Individuals use intervivos transfers and bequests to redistribute the long-run bene…ts in the form of higher after-tax wages and interest rates that will bene…t future generations toward the current generations. Indeed, in a pure life-cycle economy calibrated to the same U.S. observations, we …nd that the same reform would bene…t only 9% of the population. The increase in the consumption tax at the initial period of the transition hurts all individuals except for the very young workers. Since generations are not linked by private transfers, the e¢ -ciency gains of this reform are only enjoyed by generations born in the very far future. A popular tax reform in the pure life-cycle model is one that bene…ts current generations regardless of the impact on future generations. For instance, the elimination of capital income taxation …nanced with an increase in the wage tax bene…ts 63% of the population living at the time of the reform but decreases welfare in the long-run. Abstract

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Simulating Fundamental Tax Reform in the United States

Cited by 370 publications

References 17 publications

Aging and pension reform: extending the retirement age and human capital formation

Aging and pension reform: extending the retirement age and human capital formation

Is a flat tax reform feasible in a grown-up democracy of Western Europe? A simulation study for Germany

Altruism, incomplete markets, and tax reform

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