IDEAS home Printed from https://ideas.repec.org/a/mhr/finarc/urnsici0015-2218(201503)711_106utdmtd_2.0.tx_2-k.html
   My bibliography  Save this article

Using the Discrete Model to Derive Optimal Income Tax Rates

Author

Listed:
  • Spencer Bastani

Abstract

I demonstrate how the discrete model of optimum income taxation can be used to derive the structure of optimal income tax rates. I compare simulations of the discrete and continuous models of optimum income taxation under identical circumstances, based on U.S. wage data. The two models produce similar results once the number of types used to represent the skill distribution is sufficiently large. Whether the discrete or the continuous model is used, in order to accurately capture the shape of the optimal schedule of marginal tax rates, a large number of taxpayers should be employed.

Suggested Citation

  • Spencer Bastani, 2015. "Using the Discrete Model to Derive Optimal Income Tax Rates," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 71(1), pages 106-117, March.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201503)71:1_106:utdmtd_2.0.tx_2-k
    DOI: 10.1628/001522108X14206439673134
    as

    Download full text from publisher

    File URL: https://www.mohrsiebeck.com/en/article/using-the-discrete-model-to-derive-optimal-income-tax-rates-101628001522115x14206439673134
    Download Restriction: Fulltext access is included for subscribers to the printed version.
    File URL: https://libkey.io/10.1628/001522108X14206439673134?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Peter Diamond & Emmanuel Saez, 2011. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 165-190, Fall.
    2. Hellwig, Martin F., 2007. "A contribution to the theory of optimal utilitarian income taxation," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1449-1477, August.
    3. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 147-174, Fall.
    4. Matthew Weinzierl, 2011. "The Surprising Power of Age-Dependent Taxes," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(4), pages 1490-1518.
    5. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059.
    6. Thomas Piketty & Emmanuel Saez, 2012. "Optimal Labor Income Taxation," NBER Working Papers 18521, National Bureau of Economic Research, Inc.
    7. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2013. "The Welfare Gains Of Age‐Related Optimal Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(4), pages 1219-1249, November.
    8. 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.
    9. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March.
    10. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, vol. 49(1), pages 47-73, October.
    11. Brito, Dagobert L & Oakland, William H, 1977. "Some Properties of the Optimal Income-Tax," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 407-423, June.
    12. Tuomala, Matti, 1984. "On the optimal income taxation : Some further numerical results," Journal of Public Economics, Elsevier, vol. 23(3), pages 351-366, April.
    13. 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.
    14. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
    15. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July.
    16. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(1), pages 205-229.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Schock, Matthias Malte, 2019. "Steuerreformvorschläge des Mirrlees Committee und der Stiftung Marktwirtschaft [Tax Reform Proposals of the Mirrlees Committee and the Stiftung Marktwirtschaft]," MPRA Paper 96689, University Library of Munich, Germany.
    2. 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.
    3. Oztek, Abdullah Selim, 2019. "A Characterization for Marginal Income Tax Schedules," MPRA Paper 103046, University Library of Munich, Germany, revised 02 Dec 2019.
    4. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2019. "Nonlinear and piecewise linear income taxation, and the subsidization of work-related goods," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(4), pages 806-834, August.
    5. Dingquan Miao, 2022. "Optimal Labor Income Taxation - The Role of the Skill Distribution," LIS Working papers 823, LIS Cross-National Data Center in Luxembourg.
    6. Robin Boadway & Jean‐Denis Garon & Louis Perrault, 2019. "Optimal mixed taxation, credit constraints, and the timing of income tax reporting," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 21(4), pages 708-737, August.
    7. Ayaz, Mehmet & Fricke, Lea & Fuest, Clemens & Sachs, Dominik, 2023. "Who should bear the burden of COVID-19 related fiscal pressure? An optimal income taxation perspective," European Economic Review, Elsevier, vol. 153(C).
    8. Spencer Bastani & Laurent Simula, 2014. "Commentaires. Évaluer les limites à la redistribution : approches partielles ou approche globale ?," Économie et Statistique, Programme National Persée, vol. 467(1), pages 163-171.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Laurent Simula & Alain Trannoy, 2020. "Bunching and Rank-Dependent Optimal Income Taxation," CESifo Working Paper Series 8443, CESifo.
    2. Oztek, Abdullah Selim, 2019. "A Characterization for Marginal Income Tax Schedules," MPRA Paper 103046, University Library of Munich, Germany, revised 02 Dec 2019.
    3. 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.
    4. Louis Kaplow, 2007. "Optimal income transfers," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(3), pages 295-325, June.
    5. Tomer Blumkin & Efraim Sadka & Yotam Shem-Tov, 2015. "International tax competition: zero tax rate at the top re-established," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(5), pages 760-776, October.
    6. Laurent Simula & Alain Trannoy, 2012. "Shall we keep the highly skilled at home? The optimal income tax perspective," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 39(4), pages 751-782, October.
    7. Alari Paulus, 2016. "The antipoverty performance of universal and means-tested benefits with costly take-up," ImPRovE Working Papers 16/12, Herman Deleeck Centre for Social Policy, University of Antwerp.
    8. Masaaki Suzuki, 2014. "Debates on Individual Income Tax and Potential Japanese Tax Reforms," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 10(3), pages 371-396, October.
    9. Li, Jinlu & Lin, Shuanglin, 2016. "Optimal income taxation with discrete skill distribution," Mathematical Social Sciences, Elsevier, vol. 83(C), pages 58-70.
    10. Zoutman, Floris T. & Jacobs, Bas, 2016. "Optimal redistribution and monitoring of labor supply," Journal of Public Economics, Elsevier, vol. 135(C), pages 15-31.
    11. Stiglitz, Joseph E., 2018. "Pareto efficient taxation and expenditures: Pre- and re-distribution," Journal of Public Economics, Elsevier, vol. 162(C), pages 101-119.
    12. Bierbrauer Felix J., 2016. "Effizienz oder Gerechtigkeit?," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(1), pages 2-24, April.
    13. Morten Nyborg Støstad & Frank Cowell, 2021. "Inequality as an Externality: Consequences for Tax Design," PSE Working Papers halshs-03495989, HAL.
    14. Findeisen, Sebastian & Sachs, Dominik, 2015. "Designing efficient college and tax policies," Working Papers 15-09, University of Mannheim, Department of Economics.
    15. 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.
    16. Thomas Piketty & Emmanuel Saez, 2012. "Optimal Labor Income Taxation," NBER Working Papers 18521, National Bureau of Economic Research, Inc.
    17. Lawson, Nicholas, 2019. "Taxing the job creators: Efficient taxation with bargaining in hierarchical firms," Labour Economics, Elsevier, vol. 56(C), pages 1-25.
    18. Eren Gürer, 2021. "Equity-efficiency implications of a European tax and transfer system," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 57(2), pages 301-346, August.
    19. Carina Neisser, 2021. "The Elasticity of Taxable Income: A Meta-Regression Analysis [The top 1% in international and historical perspective]," The Economic Journal, Royal Economic Society, vol. 131(640), pages 3365-3391.
    20. Donald Bruce & Langchuan Peng, 2018. "Optimal taxation in the presence of income-dependent relative income effects," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 51(2), pages 313-335, August.

    More about this item

    Keywords

    optimum income taxation; simulations; computational methods;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mhr:finarc:urn:sici:0015-2218(201503)71:1_106:utdmtd_2.0.tx_2-k. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Wolpert (email available below). General contact details of provider: https://www.mohrsiebeck.com/fa .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.