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The Simple Economics of Bunching: Optimal Taxation with Quasi‐Linear Preferences

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  • JAN BOONE
  • LANS BOVENBERG

Abstract

This paper models unemployment as a binding nonnegativity constraint on hours worked in an optimal income tax problem with quasi‐linear preferences. We show that bunching of workers resulting from this binding constraint provides a more convincing description of the bottom of the labor market than bunching due to violation of the second‐order condition for individual optimization. Although a binding nonnegativity constraint destroys the closed form solution of optimal marginal tax rates, the optimal tax problem can be characterized in a two‐dimensional diagram in which comparative statics can be performed in straightforward fashion.

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  • Jan Boone & Lans Bovenberg, 2007. "The Simple Economics of Bunching: Optimal Taxation with Quasi‐Linear Preferences," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(1), pages 89-105, February.
    • Handle: RePEc:bla:jpbect:v:9:y:2007:i:1:p:89-105
    DOI: 10.1111/j.1467-9779.2007.00299.x
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    1. Robin Boadway & Katherine Cuff & Maurice Marchand, 2000. "Optimal Income Taxation With Quasi‐Linear Preferences Revisited," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(4), pages 435-460, October.
    2. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
    3. Boadway, Robin & Cuff, Katherine & Marchand, Maurice, 2000. "Optimal Income Taxation with Quasi-linear Preferences Revisited," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(4), pages 435-460.
    4. Boone, J. & Bovenberg, A.L., 2001. "Unemployment vs. In-work Benefits with Search Unemployment and Observable Abilities," Other publications TiSEM 50452447-7277-4b92-addd-d, Tilburg University, School of Economics and Management.
    5. Boone, J. & Bovenberg, A.L., 2001. "Unemployment vs. In-work Benefits with Search Unemployment and Observable Abilities," Discussion Paper 2001-77, Tilburg University, Center for Economic Research.
    6. Lollivier, Stefan & Rochet, Jean-Charles, 1983. "Bunching and second-order conditions: A note on optimal tax theory," Journal of Economic Theory, Elsevier, vol. 31(2), pages 392-400, December.
    7. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July.
    8. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
    9. Bovenberg, Lans & Boone, Jan, 2001. "Unemployment versus In-work Benefits with Search Unemployment and Observable Abilities," CEPR Discussion Papers 3043, C.E.P.R. Discussion Papers.
    10. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
    11. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, vol. 49(1), pages 47-73, October.
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    Cited by:

    1. Bierbrauer, Felix J. & Boyer, Pierre C., 2013. "Political competition and Mirrleesian income taxation: A first pass," Journal of Public Economics, Elsevier, vol. 103(C), pages 1-14.
    2. Laurent Simula, 2010. "Optimal nonlinear income tax and nonlinear pricing: optimality conditions and comparative static properties," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 35(2), pages 199-220, July.
    3. Brett, Craig & Weymark, John A., 2008. "The impact of changing skill levels on optimal nonlinear income taxes," Journal of Public Economics, Elsevier, vol. 92(7), pages 1765-1771, July.
    4. Pierre C. Boyer & Felix J. Bierbrauer, 2014. "The Pareto-Frontier in a Simple Mirrleesian Model of Income Taxation," Annals of Economics and Statistics, GENES, issue 113-114, pages 185-206.
    5. Boadway, Robin & Jacquet, Laurence, 2008. "Optimal marginal and average income taxation under maximin," Journal of Economic Theory, Elsevier, vol. 143(1), pages 425-441, November.
    6. Laurent Simula & Alain Trannoy, 2023. "Bunching in rank-dependent optimal income tax schedules," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 60(1), pages 237-263, January.
    7. Laurent Simula, 2007. "Optimality conditions and comparative static properties of non-linear income taxes revisited," PSE Working Papers halshs-00588074, HAL.

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