The welfare gain from age-dependent taxation

There is now a substantial body of literature that advocates for tax rates that would depend on the age of the individual. The logic is simple: the dispersion of wages increases over age, thus the scope for redistribution increases. And if you want to encourage human capital accumulation, you want to tax high incomes more when young than when old. And the uncertainty about outcomes decreases considerably with age. Finally, the source of income varies over time, with capital income taking over labor income at retirement. And, by the way, I previously reported that age-dependent taxation could allow a transition from a pay-as-you-go social security system to a fully funded one.

Spencer Bastani, Sören Blomquist and Luca Micheletto add to this literature in two ways: first they take into account within cohort heterogeneity, second they quantitatively evaluate the welfare gain from a linear age-dependent tax on income. In their overlapping-generation economy, agents face uncertainty about future outcomes and can save. They find that one does not need to tax capital, which is very useful as one does not need to worry about incentive compatibility (it is difficult to lie about one's age) when trying to reach golden rule capital accumulation. Calibrating to Sweden and the United States, they find that a nonlinear age-dependent income tax provides a welfare gain corresponding to about 2-3% respectively 2-2.5% compared to an age-independent one. That is certainly not negligible.

And how the taxes look like? The marginal labor income tax rates are decreasing. That is consistent with this model, as one tries to increase the savings rate to the golden rule level and savings should be encouraged. And the old are systematically paying higher labor income taxes than the young at the same level of income. This is because, I think, capital income taxes are then much lower, and older workers have much more capital income. I wonder how this would look like if human capital accumulation were included as well...