Why People Should be Taxed Based on Age

The primary vehicle for the US government to fund its operations is to tax the income of its citizens. The more you earn, the higher percentage of your income you pay in taxes. At least that's the idea. Others have argued for a flat tax, whereby everyone pays the same fixed percentage, 15%, say, regardless of how much is earned. And still other reformers advocate doing away with income taxes altogether and instead tax by consumption or even by gender.

Now Harvard Business School economist Matthew C. Weinzierl, whose research focuses on the optimal design of tax policy, advances the case for a tax based not on how much you earn, but on your age. In general, older people up to the age of 55 would be taxed more than younger ones, giving those just starting out in their careers more cash to spend.

Under one scenario explored in Weinzierl's paper The Surprising Power of Age-Dependent Taxes, a worker earning $44,000 would face an average tax rate early in his career that is approximately 20 percent
less than when he is in his peak earning years.

The idea behind this plan is that people spend, save, and redistribute money through the economy differently at various times of their lives. A 25-year-old with an income of $100,000 and no family uses money differently than a 45-year-old parent starting to think about sending kids to college and eventual retirement. Age-dependent taxation would provide a number of benefits for the economy in terms of efficiency and equity, Weinsierl and other scholars on this topic believe.

Lower taxes on average.
Fewer young people saddled by debt just as they are starting out.
Motivates against "oversaving," which undermines the tax system.
Less taxes paid by lower-income earners.
More efficient wealth redistribution through the economy.

In case you think the idea of age-dependent taxes is crazy, one person who doesn't is President Obama. During his run for office he pledged to "eliminate all income taxation of seniors making less than $50,000 per year." It didn't happen, but it shows tax policy based on age is not that far off the policymaking radar.

Are you ready to replace the current US income tax? What's your alternative?

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(Photo by Flickr user Gamma Man, CC 2.0)

Sean Silverthorne

Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.

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