In the article “Taxation under Learning-by-doing,” recently published in the Journal of Political Economy, Professors Makris (University of Kent, UK) and Pavan (Northwestern University, USA) argue that the average tax rate paid by earners in the age bracket 45-65 should be 5% higher than the average tax rate paid by workers in the age bracket 20-44.
This policy prescription is obtained in a model that captures most of the key features of the US economy. In contrast to previous work, the result accounts for the fact that, because of learning-by-doing, workers tend to become more productive on average over their lifecycle the more they work when young.
Makris and Pavan also show that reforming the current US tax code by adopting such tax differences across age brackets could bring welfare gains to each taxpayer equivalent to those brought in by a 4% increase in annual consumption throughout their entire work life.
These gains are significant to warrant the policymakers’ consideration and shape the debate on how to best reform existing tax codes in the US and other developed economies.
Makris met Pavan during a sabbatical leave when he visited Northwestern University and they began to talk about the issues addressed by their research.
“Our motivation was to understand the implications for the design of income tax code and the alleviation of inequality of taking into account that learning-by-doing is an important determinant of workers’ productivity.”