A Road Map for Efficiently Taxing Heterogeneous Agents

This paper characterizes optimal labor-income taxes that depend on age, household assets, and filing status (one or two earners) within a life-cycle model with heterogeneous, two-member households and endogenous human capital. The key innovation is a labor supply elasticity that varies endogenously among households. I find that tax distortions should be hump shaped in age, decrease in household assets, and be lower for joint relative to single filers. Age and assets act as complements within the optimal tax policy. In contrast, filing status neither complements nor crowds out the age and asset tag. Overall, a tax system using all three tags can increase consumption up to 6.4 percent and welfare up to 1.5 percent