Endogenous longevity and optimal tax progressivity.

Area of Science:

• Economics
• Public Finance
• Demography

Background:

• Longevity varies significantly across skill levels, impacting economic inequality.
• Existing economic models often assume fixed lifespans, overlooking endogenous longevity.
• Understanding the interplay between longevity, taxation, and inequality is crucial for welfare analysis.

Purpose of the Study:

• To analyze the effect of endogenous longevity on optimal tax progressivity.
• To compare optimal tax progressivity in models with endogenous versus exogenous longevity.
• To evaluate the implications for the US tax system and income inequality.

Main Methods:

• Utilizing an overlapping generations model with skill heterogeneity.
• Incorporating endogenous longevity influenced by individual choices and skill levels.
• Calibrating the model to a stylized representation of the US economy.

Main Results:

• Increased tax progressivity reduces longevity gaps and income inequality but lowers average lifetime income.
• The welfare-maximizing income tax is less progressive with endogenous longevity compared to exogenous longevity.
• Optimal tax progressivity in the US is estimated to be lower than under the current tax system.

Conclusions:

• Endogenous longevity necessitates a less progressive tax system for maximizing social welfare.
• The findings suggest potential over-progressivity in the current US tax structure.
• Results remain robust across various assumptions regarding labor supply elasticity, annuity markets, and health.