Mixing up optimal taxation and optimal consumption
The last time we've been with our OLG papers to the Baltic Economic Conference, it was 2019. Two lifetimes passed: the pandemic, the war... The crowd of BEC is invariably inspiring and stimulating, with great papers in our session, building bridges between optimal taxation and optimizing consumption. Great comments from Justina Klimaviciute, Merike Kukk and Swapnil Singh.
The paper studies interactions between the progressive labor tax and the social security reform. Increasing longevity necessitates reforming social security due to raising the fiscal strain on the current systems. The current systems are redistributive, which provides (at least partial) insurance against idiosyncratic income shocks, but at the expense of labor supply distortions. Analogously, linking pensions to individual incomes reduces distortions associated with social security contributions, but ushers insurance loss. The existing view in the literature is that net outcome of such reform is negative. Contrary to this view, we show that progressive labor tax can partially substitute for the insurance loss when social security becomes less redistributive.