Wealth taxation and life expectancy

This paper studies the role of wealth taxes in providing insurance against lifespan risk through the lens of a dynamic Mirrlees model with altruism. I derive novel formulas linking optimal taxes on savings and bequests to the degree of annuity market imperfections at the optimum. In the presence of positive correlation between productivity and life expectancy, optimal annuity markups are positive in expectation. This creates a motive not only for taxing savings but also for subsidizing bequests. When calibrating the model, I find that the forces of differential longevity lead to optimal wealth taxes commensurate with prevailing wealth tax rates in developed countries. Relative to the US status quo, optimal policies provide work incentives by increasing welfare of the short-lived at the bottom of the skill distribution. This channel generates significant welfare gains. Replacing the optimal annuity markup by a nonlinear history-independent approximation generates small efficiency losses. • Optimal taxes on savings and bequests are linked to optimal annuity distortions. • By longevity differences, positive annuity loadings coexist with bequest subsidies. • Relative to the status quo, optimal policy increases short-lived welfare at the bottom. • This channel can generate significant welfare gains. • History-independent progressive annuity markups are close to optimal.