A rational, economic model of paygo tax rates

Georges De Menil*, Fabrice Murtin, Eytan Sheshinski, Tite Yokossi

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

We argue that paygo rates are determined by a representative agent and a benevolent government jointly maximizing the expected life-time utility of the agent. The distributions of labor and capital income are calculated from national data on real GDP, real wages and the real return to capital since 1950. With uniform risk aversion, predicted rates explain 83% of the variance of observed rates. The globalization of capital markets would lead to convergence of paygo rates. Our results are immune to crises like 2008.

Original languageEnglish
Pages (from-to)55-72
Number of pages18
JournalEuropean Economic Review
Volume89
DOIs
StatePublished - 1 Oct 2016

Bibliographical note

Publisher Copyright:
© 2016 Elsevier B.V.

Keywords

  • National capital markets
  • OLG
  • Paygo
  • Risk aversion
  • Savings

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