Optimal life-cycle capital taxation under self-control problems
Pavoni, Nicola and Yazıcı, Hakkı (2017) Optimal life-cycle capital taxation under self-control problems. Economic Journal, 127 (602). pp. 1188-1216. ISSN 0013-0133 (Print) 1468-0297 (Online)
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Official URL: http://dx.doi.org/10.1111/ecoj.12323
We study optimal taxation of savings in an economy where agents face self-control problems and the severity of these problems possibly depends on age. Focusing on quasi-hyperbolic discounting, we show that if agents' ability to self-control increases concavely with age, then savings should be subsidised and the subsidy should decrease with age. Quantitatively, we find that the optimal subsidies in our calibrated model with age-dependent self-control are much larger than those implied by models with constant self-control. Our optimal subsidies are of comparable magnitudes to those implied by the 401(k) plan, even though the latter prescribes subsidies increasing with age.
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