Optimal Mirrleesean Taxation in a Ben-Porath Economy
2015 ◽
Vol 7
(2)
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pp. 219-248
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Keyword(s):
The Us
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I characterize optimal taxes in a life-cycle economy where ability and human capital are unobservable. I show that unobservable human capital effectively makes preferences over labor nonseparable across age. I generalize the static optimal tax formulas to account for such nonseparabilities and show how they depend both on own-Frisch labor elasticities and cross-Frisch labor elasticities. I calibrate the economy to US data. I find that the optimal marginal income taxes decrease with age, in contrast to both the US tax code and to a model with observable human capital. I demonstrate that the behavior of cross-Frisch elasticities is essential in explaining the decline. (JEL D91, H21, H24, J24)