Title: Insurance and taxation over the life cycle
Description: "We consider a dynamic Mirrlees economy in a life cycle context and study the op- timal insurance arrangement.  Individual productivity evolves as a Markov process and is private information.  We use a first order approach in discrete and continuous time and obtain novel theoretical and numerical results.  Our main contribution is a formula describing the dynamics for the labor-income tax rate.  When productivity is an AR(1) our formula resembles an AR(1) with a trend where: (i) the auto-regressive coefficient equals that of productivity; (ii) the trend term equals the covariance pro- ductivity with consumption growth divided by the Frisch elasticity of labor; and (iii) the innovations in the tax rate are the negative of consumption growth.  The last prop- erty implies a form of short-run regressivity.  Our simulations illustrate these results and deliver some novel insights.  The average labor tax rises from 0% to 46% over 40 years, while the average tax on savings falls from 17% to 0% at retirement.  We com- pare the second best solution to simple history independent tax systems, calibrated to mimic these average tax rates.  We find that age dependent taxes capture a sizable fraction of the welfare gains.  In this way, our theoretical results provide insights into simple tax systems"--National Bureau of Economic Research web site.