Download Taxation, Incomplete Markets, and Social Security (Munich by Peter A. Diamond PDF

By Peter A. Diamond

In this ebook, Peter Diamond analyzes social protection as a particular
instance of optimum taxation conception. Assuming a global of incomplete markets and
uneven details, he makes use of a number of easy types to light up the
monetary forces that endure on particular social safety coverage concerns. the focal point is on
the measure of progressivity fascinating in social safeguard and the layout of
incentives to hold up retirement past the earliest age of eligibility for benefits.
earlier than reading those versions, Diamond offers introductions to optimum source of revenue tax
conception and the speculation of incomplete markets. He comprises contemporary theoretical
advancements reminiscent of time-inconsistent personal tastes into his analyses and exhibits that
distorting taxes and a degree of progressivity in advantages are fascinating. Diamond
additionally discusses social protection reform, with a spotlight on Germany.

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Extra info for Taxation, Incomplete Markets, and Social Security (Munich Lectures)

Sample text

See, for example, Tuomala (1990). 3 Models of Optimal Lifetime Income Taxation with TimeConsistent Preferences Unlike annual income taxation, social security systems look at earnings over much or all of a career. Therefore, one starting place for consideration of social security is to reinterpret the Mirrlees model as one relating the present discounted value of lifetime consumption to the present discounted value of lifetime earnings. Indeed, Vickrey (1947) has proposed such taxation, with taxes collected each year as a form of withholding for lifetime calculations that are not completed until death.

See, for example, Auerbach and Kotlikoff (1987). ð3:4Þ Income Taxation with Time-Consistent Preferences 25 Note the assumption that everyone has the same investment opportunities (r does not vary with n). 4), we can examine the pattern of the optimal consumption replacement rate, c=x, in terms of the degrees of risk aversion when young and when old. 6), we can relate the consumption replacement rate to the level of first-period consumption:   dðcn =xn Þ cn dcn dxn ¼ À dn xn cn dn xn dn   cn R1 ½xn Š dxn À1 : ð3:7Þ ¼ xn R 2 ½cn Š xn dn We need to recognize that the indices of risk aversion are evaluated at different consumption levels.

Following the same logic as above, from the separability between labor and consumption we have v1 ½xn ; cn Š=v2 ½xn ; cn Š ¼ r independent of n; dðcn =xn Þ ¼ 0: dn ð3:10Þ In this case, the replacement rate is constant and so social security is linear in terms of after-tax consumption. Even this case would not lend itself to repeated use of an annual income tax after a linear payroll tax unless the replacement rate were one. It would be interesting to explore other assumptions on preferences, reflecting both interaction between consumption in the two periods and greater risk aversion among the elderly.

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