"Consolidated Income Accounts"

Abstract:
This paper develops a novel implementation of the constrained optimal allocations in dynamic stochastic environments with heterogeneous agents. We show that a tax system based on a straightforward yet practical idea of consolidated income accounts (CIA) implements the optimum: The labor income tax depends on the current labor income of an agent and on the balance on the agent's CIA. The savings tax depends only on the amount of agent's current savings. The CIA balance is then updated as a function of the labor income and the previous balance.