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Optimal redistributive taxation with both extensive and intensive responses

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  • Jacquet, Laurence
  • Lehmann, Etienne
  • Van der Linden, Bruno

Abstract

We study optimal income taxation when labor supply reacts along the intensive and extensive margins. Individuals are heterogeneous across two unobserved dimensions: their skill and disutility of participation. We develop a new method to analytically derive conditions under which optimal marginal tax rates are non-negative everywhere. It is typically optimal to provide a distinct level of transfer to the non-employed and to workers with negligible earnings. Numerical simulations illustrate these properties for the US. We also apply our method to sign output distortions in other adverse selection frameworks with random participation, namely the monopoly nonlinear pricing and the regulatory monopoly problems.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 148 (2013)
Issue (Month): 5 ()
Pages: 1770-1805

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Handle: RePEc:eee:jetheo:v:148:y:2013:i:5:p:1770-1805

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Optimal taxation; Intensive margin; Extensive margin; Marginal tax rates; Random participation;

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Citations

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Cited by:
  1. LEHMANN, Etienne & Simula, Laurent & TRANNOY, Alain, 2013. "Tax Me If You Can! Optimal Nonlinear Income Tax between Competing Governments," Working Paper Series, Center for Fiscal Studies 2013:8, Uppsala University, Department of Economics.
  2. Bas Jacobs, 2010. "The Marginal Cost of Public Funds is One," CESifo Working Paper Series 3250, CESifo Group Munich.
  3. Etienne Lehmann & Alexis Parmentier & Bruno Van Der Linden, 2008. "Optimal Income Taxation with Endogenous Participation and Search Unemployment," Documents de recherche 08-16, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  4. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, vol. 200(1), pages 15-39, March.
  5. Bas Jacobs, 2013. "From Optimal Tax Theory to Applied Tax Policy," CESifo Working Paper Series 4151, CESifo Group Munich.
  6. Laurence JACQUET & Etienne LEHMANN, 2014. "Optimal Nonlinear Income Taxation with Multidimensional Types: The Case with Heterogeneous Behavioral Responses," THEMA Working Papers 2014-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  7. Normann Lorenz & Dominik Sachs, 2011. "Optimal Nonlinear Taxation, Minimum Hours, and the Earned Income Tax Credit," Research Papers in Economics 2011-11, University of Trier, Department of Economics.
  8. Michau, Jean-Baptiste, 2014. "Optimal redistribution: A life-cycle perspective," Journal of Public Economics, Elsevier, vol. 111(C), pages 1-16.
  9. Findeisen, Sebastian & Sachs, Dominik, 2014. "Efficient Labor and Capital Income Taxation over the Life Cycle," Working Papers 14-17, University of Mannheim, Department of Economics.
  10. Bas Jacobs & Ruud A. de Mooij, 2011. "Pigou Meets Mirrlees: On the Irrelevance of Tax Distortions for the Second-Best Pigouvian Tax," CESifo Working Paper Series 3342, CESifo Group Munich.
  11. Laurence Jacquet & Craig Brett, 2012. "Workforce or Workfare? The Optimal Use of Work Requirements when Labor is Supplied along the Extensive Margin," THEMA Working Papers 2012-40, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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