Redistribution through Taxes or Pensions? Optimal Income Tax and Pension Progressivity

By Burkhard Heer & Mark M. Trede We develop a medium-scale overlapping-generations model with endogenous labor supply and skill premium to study optimal income redistribution using progressive labor income taxes and pensions. The model is calibrated to the four countries USA, Great Britain, Italy and Germany which differ substantially in their tax and pension systems, demographics, and skill shares among workers. Optimal pension benefits are proportional to lifetime contributions in all four countries, while the optimal degree of income tax...