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Redistribution with Unequal Life Expectancy

Author

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  • Sebastian Koehne

Abstract

This paper introduces life expectancy inequality into a tractable Mirrleesian life-cycle model and characterizes the optimal income tax policy using theory and calibration. A positive association between life expectancy and income counteracts the well-known static pattern of declining marginal utility. As a result, the mechanical value of redistribution is reduced at all income levels. Moreover, the pension wedge becomes a novel determinant of optimal taxation, motivating relatively lower optimal tax rates for low earners and relatively higher optimal tax rates for high earners. Quantitatively, the effects of the mechanical value of redistribution dominate, and the optimal marginal tax rates fall by up to 10 percentage points when life expectancy is heterogeneous.

Suggested Citation

  • Sebastian Koehne, 2023. "Redistribution with Unequal Life Expectancy," CESifo Working Paper Series 10684, CESifo.
    • Handle: RePEc:ces:ceswps:_10684
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp10684.pdf
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    More about this item

    Keywords

    optimal taxation; redistribution; life expectancy; inequality;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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