The Global Life-Cycle Optimizer - Analyzing Fiscal Policy's Potential to Dramatically Distort Labor Supply and Saving / Johannes Brumm, Laurence J. Kotlikoff, Christopher Krause.

Format:

Book

Author/Creator:

Brumm, Johannes.

Contributor:

National Bureau of Economic Research.

Kotlikoff, Laurence J.

Krause, Christopher.

Series:

Working Paper Series (National Bureau of Economic Research) no. w32335.

NBER working paper series no. w32335

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2024.

Summary:

Fiscal policy in the U.S. and other countries renders intertemporal budgets non-differentiable, nonconvex, and discontinuous. Consequently, assessing work and saving responses to policy requires global optimization. This paper develops the Global Life-Cycle Optimizer (GLO), a stochastic pattern-search algorithm. The GLO robustly, precisely, and quickly locates global optima in highly complex fiscal settings. We use the GLO to study how a stylized U.S. fiscal system distorts workers' labor supply and saving assuming standard preferences. The system incorporates kinks from federal personal income tax brackets, Social Security's FICA tax, and a notch from the provision of basic income below a threshold. The GLO reproduces theoretically predicted earnings bunching and flipping over a remarkably wide range of wage rates. Saving distortions can be equally dramatic. Associated excess burdens range from substantial to massive. Restricting labor supply to full-or part-time work can eliminate flipping when it's optimal and produce flipping when it's suboptimal. Joint filing can significantly reduce the earnings of lower-wage spouses relative to that of higher-wage spouses. The GLO can be applied to assess a country's or state's full set of work and saving disincentives. Consequently, it can facilitate analyses of structural labor supply and tax reform.

Notes:

Print version record

April 2024.