Favorable tax treatment of older workers in general equilibrium

Johan Gustafsson ()
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Johan Gustafsson: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden, https://www.umu.se/handelshogskolan

No 1023, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: The present paper studies how to encourage longer careers by reducing labor income taxes for older workers. The analysis relies on numerical experiments within a general equilibrium overlapping generations model that is calibrated to an average OECD economy. I find that the policy can delay retirement and increase tax revenue if treatment occurs close to, and before, the preferred retirement age. A non-trivial share of the increased post-treatment labor supply can be explained by the substitution of hours worked from the pre-treatment career to the post-treatment career. Lowering the treatment age only leads to small changes in the aggregate labor supply, but is increasingly costly for the government in terms of forgone revenue. Tax shifting toward higher consumption taxes always increases welfare, while tax shifting toward higher capital or labor income taxes paid by younger workers only increases welfare if treatment occurs sufficiently late in the career.

Keywords: age-dependent taxation; OLG model; retirement (search for similar items in EconPapers)
JEL-codes: E21 H24 J22 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2024-03-04
New Economics Papers: this item is included in nep-age, nep-dge, nep-lma, nep-pbe and nep-pub
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