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 non-differentiable, 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. 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 labor-income risk demonstrate the versatility of the GLO. The GLO outperforms value function iteration and readily solves cases where value function iteration is infeasible.