Steady-state solutions of optimal tax mixes in an overlapping-generations model

Abstract

This paper analyzes steady-state solutions of optimal tax mixes in an overlapping-generations model of heterogeneous individuals with a utilitarian social welfare function. A test with Cobb-Douglas utility functions shows that an uneven distribution of the innate abilities leads to high rates of consumption and wage-income taxes, and a high level of a lump-sum transfer. The more the labor force works, the higher the optimal tax on wage income. Significant differences in individual preferences lead to low rates of consumption and wage-income taxes and to a high rate of interest-income tax. With identical preferences, the rate of interest-income tax is zero. © 1991.