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Optimal Nonlinear Income Taxation with a Two-Dimensional Population; A Computational Approach

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  • Tarkiainen, Ritva
  • Tuomala, Matti

Abstract

We consider the optimal income tax problem when income differences are due to differences in abilities and in preferences between consumption and leisure among individuals. We model this problem as an optimal control problem and develop a numerical method for solving it. The method is based on the expansion of state and control variables in Lagrange series and on a spectral collocation method for approximating state equations. In this way the optimal control problem is reduced to a parameter optimization problem. The problem is difficult to solve, but we managed to do so with some limitations. On the basis of our calculations we conclude that the tax system in the two-dimensional case is more redistributive compared to that obtained from the one-dimensional model. Citation Copyright 1999 by Kluwer Academic Publishers.

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Bibliographic Info

Article provided by Society for Computational Economics in its journal Computational Economics.

Volume (Year): 13 (1999)
Issue (Month): 1 (February)
Pages: 1-16

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Handle: RePEc:kap:compec:v:13:y:1999:i:1:p:1-16

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Web page: http://www.springerlink.com/link.asp?id=100248
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Cited by:
  1. Bastani, Spencer & Blomquist, Sören & Micheletto, Luca, 2010. "Public Provision of Private Goods, Tagging and Optimal Income Taxation with Heterogeneity in Needs," Working Paper Series, Center for Fiscal Studies 2010:14, Uppsala University, Department of Economics.
  2. Jordahl, Henrik & Micheletto, Luca, 2002. "Optimal Utilitarian Taxation and Horizontal Equity," Working Paper Series 2002:19, Uppsala University, Department of Economics.
  3. Sören Blomquist & Vidar Christiansen, 2008. "Taxation and Heterogeneous Preferences," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 64(2), pages 218-244, June.
  4. Matti Tuomala & Sanna Tenhunen, 2013. "On the design of an optimal non-linear tax/pension system with habit formation," International Tax and Public Finance, Springer, vol. 20(3), pages 485-512, June.

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