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Quantifying the welfare gains from history dependent income taxation

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dc.contributor.author Kapicka, Marek
dc.date.accessioned 2017-11-28T09:38:36Z
dc.date.available 2017-11-28T09:38:36Z
dc.date.issued 2017-08
dc.identifier.uri http://hdl.handle.net/10230/33365
dc.description.abstract I quantify the welfare gains from introducing history dependent income tax in an incomplete markets overlapping generations framework where individuals face uninsurable idiosyncratic shocks. I assume that the income tax paid is a function of a geometrical weighted average of past incomes, and solve for the optimal weights. I find that the two main factors that determine the nature of history dependence are the degree to which the government discounts future generations and the degree of mean reversion in the productivity process. The welfare gains from history dependence are large, about 1.76 percent of consumption. I decompose the total effect into an efficiency effect that increases labour supply, and an insurance effect that reduces volatility of consumption and find that, quantitatively, the insurance effect dominates the efficiency effect. The optimal tax increases consumption insurance by trading higher tax progressivity with respect to past incomes for a reduced tax progressivity with respect to the current income.
dc.description.sponsorship The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries ADEMU Working Paper Series;71
dc.rights This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.
dc.rights.uri https://creativecommons.org/licenses/by/4.0/
dc.title Quantifying the welfare gains from history dependent income taxation
dc.type info:eu-repo/semantics/workingPaper
dc.subject.keyword Risk sharing
dc.subject.keyword Income taxation
dc.subject.keyword Incomplete markets
dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/649396
dc.rights.accessRights info:eu-repo/semantics/openAccess

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