RESEARCH
RESEARCH
Macroeconomics
Public Economics
Health Economics
Household Finance
Quantitative Macroeconomics
Optimal Taxation
Overlapping-Generations Model
Health risk reshapes household saving by increasing the role of assets as self-insurance against uncertain medical needs in old age. This paper studies how health-induced precautionary saving affects the optimal fiscal policy, including capital and labour tax, public medical insurance, and government debt, in an overlapping-generations economy. I develop a quantitative two-period model with permanent income heterogeneity, uncertain old-age health, endogenous medical expenditure, and public medical reimbursement. The model is disciplined using empirical variation in medical spending across income and health groups and is solved as a Ramsey problem with government commitment. Medical expenditures in old age increase asset accumulation of both high- and low-income households. When preferences for consumption and leisure are separable, the government relies primarily on labour income taxation, with a small optimal long-run capital tax. Partial medical reimbursement remains optimal. When they are non-separable, capital taxation plays a greater role, although medical expenditures raise its optimal rate only modestly (from 9% to 11%), while reimbursement converges to zero. Additional private saving is largely accommodated through adjustments in government debt rather than productive capital. The central implication is that the optimal fiscal response to medical expenditures depends not simply on increased household saving, but on its interaction with taxation, public insurance, and government financing.
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We analyze optimal time-varying fiscal policy in an open economy with overlapping generations under perfect commitment. Governments may tax labour and capital at source, choose government spending, and issue debt. We show analytically that (i) the modified golden rule is optimal in both closed and open economies, (ii) long-run capital taxes will optimally be identical across countries if and only if discount factors coincide, (iii) long-run capital taxes are different from zero if and only if the marginal utilities of consumption differ across generations. We compute transitions and steady states for time-varying fiscal policies. In line with previous results in closed economies, we find that long-run capital taxes are non-zero in plausible scenarios, with non-separable preferences and/or non-constant labour-supply elasticities across generations. With common discount factors, international capital mobility attenuates these taxes toward zero relative to the closed-economy benchmark. With heterogeneous discount factors, however, long-run capital taxes in open economies may be higher or lower than in a closed economy. Cross-border capital-tax externalities do not converge to zero in the long run when capital taxes are optimally non zero.
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This paper examines whether the changes in long-term care (LTC) preferences, saving behavior, and policy attitudes observed during the COVID-19 pandemic have persisted in the post-pandemic period. Using new survey data collected in 2023 from a representative sample of working-age individuals in Ontario and Qu ́ebec, we compare responses to those obtained during the first phase of the pandemic in 2020. We document that nursing-home aversion remains widespread several years after the crisis and continues to shape economic behavior and policy preferences. Individuals who are more averse to nursing homes are sig-nificantly more likely to plan to increase saving for old age and to support public subsidies for home care. These relationships are robust across demographic and socioeconomic groups, indicating that the effects are not confined to specific subpopulations. Overall, our findings suggest that the pandemic has led to persistent changes in preferences with important implications for LTC financing and policy design. In particular, the continued mismatch between household preferences and the current emphasis on institutional care highlights the need to reassess the allocation of public resources toward home-based care.
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