The Global Life-Cycle Optimizer – Analyzing Fiscal Policy's Potential to Dramatically Distort Labor Supply and Saving

Fiscal policy in the U.S. and other countries renders intertemporal budgets nondifferentiable, non-convex, and discontinuous. Consequently, assessing work and saving responses to policy requires global optimization. This paper develops the Global Life-Cycle Optimizer (GLO), which robustly and precisely locates global optima in highly complex fiscal settings. We use the GLO to study how a stylized U.S. fiscal system distorts workers’ labor supply and saving over the life-cycle. The system incorporates kinks from federal income tax brackets, Social Security’s FICA tax, and a notch from the provision of basic income below a threshold. The GLO reproduces theoretically predicted earnings bunching and flipping over a remarkably wide range of wage rates. Saving distortions and associated excess burdens are substantial. Extensions with discrete labor supply, joint taxation of couples, social security, and wage shocks demonstrate the GLO’s versatility.