The effects of population aging on optimal redistributive taxes in an overlapping generations model

Abstract

The impact of population aging on the steady state solution to a Ordover and Phelps (1979) overlapping generations optimal nonlinear income tax problem with two types of workers and quasilinear-in-leisure preferences is investigated. A decrease in the rate of population growth, which leads to an aging population, increases the relative price of consumption per person in retirement, which tends to decrease optimal consumption for retirees of both skill types. It is also shown that the optimal steady state rate of interest equals the rate of population growth. As a result, the steady state interest rate unambiguously declines when the rate of population growth declines. The resulting adjustments in production plans has an ambiguous effect on the aggregate wage rate. This article identifies factors contributing to an increase in the aggregate wage when the population ages, namely normality of consumption in retirement, complementarity between capital and labor in production, and a large capital deepening effect relative to the increase in dependency owing to demographic change. Depending on the sign of this wage effect, ambiguities may arise in the direction of change in the optimal steady state consumption and production plans. It is also shown that the optimal marginal income tax rates are independent of the rate of population growth.JEL classification: D82, H21

Tax Revenues and Aging in Ex-communist EU Countries

“…Our findings confirm the results of Mincer [1970] and Visco [2001], but are in contradiction to the outputs obtained by Goudswaard and Van de Kar [1994], Razin, Sadka, and Swagel [2002] and Brett [2012]. The explanation is that the considered sample includes an ex-communist area, more interested in redistribution, with strong economic disequilibrium, high revenue amounts for older persons and a low degree of meritocracy.…”

“…Finally, Brett [2012] analyzes the effects of population ageing on optimal redistributive taxes in an overlapping generation model, having as a starting point the results of Ordover and Phelps [1979]. The optimal tax concept is related to a nonlinear approach which has as its starting points the production and utility functions.…”

On the redistributive power of pensions

“…Finally, it should be noted that the present study focuses on redistribution and ignores a number of important aspects of pension systems, such as uncertainty and insurance (Diamond and Mirrlees 1978;Golosov et al 2016), political considerations (Cremer et al 2008), and demographics (Brett 2012).…”

Comparative Statics of Optimal Nonlinear Income Taxation with a Publicly Provided Input and a Nonlinear Production Technology

“…In order to develop a nontrivial model of the interactions between the provision of nonlabor inputs and the income tax system, it is necessary to consider a nonlinear production technology. To the best of our knowledge, with the exception of Brett (), all of the previous work on the comparative statics of optimal nonlinear income taxation has assumed that the production technology is linear and, hence, that wages are fixed. With a nonlinear production technology, wages are determined endogenously, which necessitates taking account of general equilibrium effects of changes in the parameters of the model that are not present when the technology is linear.…”

“…We employ techniques borrowed from the theory of consumer demand, also used by Brett (), to derive comparative static results for our reduced‐form problem. Our comparative static analysis focuses on the effects of changes in the following variables: the welfare weights in the reduced‐form problem, a measure of the disutility of working, and the marginal cost of the publicly provided input.…”