The median household income in the United States is $50,000. So if you’re a single person living alone and earning $100,000 you’re in pretty good shape. But it’s obvious that a single 25 year old earning $100,000 is in a very different situation from a single 50 year old earning $100,000 or a single 75 year old earning $100,000. Should the tax code take these differences into account? Matthew Weinzierl from Harvard Business School argues that we should and that the benefits of such a reform could be enormous.
He claims that an optimal age-linked tax scheme “lowers marginal taxes on average and especially on high-income young workers and lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted” while generating a “welfare gain equal to between 0.6% and 1.5% of aggregate annual consumption.”
This is the kind of thing we should probably be talking more about. Washington is obsessed with the idea of repeating the 1986 tax reform that closed loopholes and lowered marginal rates. It’s a good idea, but the reason we’re talking about it again 25 years later is that it wasn’t a very “sticky” reform. The age thing would, I think, be much stickier. The fact that real assessments of economic well-being should be age-linked is extremely intuitive to people, and my feeling is that if an age-linked system were in place already, people would see it as obviously correct and fair and want to stick with it.