Alessandro Pavan, professor of economics, is investigating the productivity of workers as they age and their correlation to taxes.
The research is part of a joint effort between Northwestern University and the University of Kent, and it was based on a model that captures the key features of the U.S. economy. Using this model, researchers determined 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 in the United States. This is due to the fact that older workers tend to be more productive than their younger counterparts, both due to age and experience.
The research suggests that reforming the current U.S. tax code by adopting these 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.
“A reduction in the taxes levied on young earners paired, where necessary, with an increase in the taxes levied on older workers, may bring significant welfare gains. This is because age-dependent taxes permit the government to generate tax revenues more efficiently by reducing the distortions in labor supply of those workers, the young, whose investments in human capital count the most. Furthermore, by incentivizing the young to work more to boost their productivity, the government can take advantage of a more productive population when the young turn old, collecting taxes from them in a less distortionary manner, which also brings non-negligible welfare gains,” Pavan said.
Read more about the study in Northwestern Now.