OPTIMAL TAXATION IN A LIFE-CYCLE MODEL

We extend Deaton's atemporal optimal commodity tax model to a life-cycle environment in which the individual may choose to work in many periods. We are able to confirm the Corlett-Hague intuition - goods that are more complementary with leisure should be taxed at higher rates. In addition, we prove that, in the microeconomic framework underlying some popular general-equilibrium models, if real wage and interest rates are constant over the life cycle, the addition of some interest taxation to a consumption tax regime would be welfare improving and that optimal labour tax rates decline with age.