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Taxing Uncertain Incomes

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  • Mirrlees, J A

Abstract

This paper studies nearly optimal income taxation when individuals are uncertain about their wages and when the government observes individual income with errors. Given the distribution of observed wage rates, it asks how the proportion of inequality known ex ante to individuals, or the proportion of observed inequality due to errors of observation, should affect optimal taxes. The taxes compared are nearly optimal for small inequality. First approximations to optimal taxes are found for these problems and also for the many-good optimal commodity tax problems. Among other results, it is found that wage uncertainty usually decreases the optimal earnings-tax rate and that errors of observation always do. Copyright 1990 by Royal Economic Society.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 42 (1990)
Issue (Month): 1 (January)
Pages: 34-45

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Handle: RePEc:oup:oxecpp:v:42:y:1990:i:1:p:34-45

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Cited by:
  1. Catarina Reis & Vasia Panousi, 2012. "Optimal Capital Taxation with Idiosyncratic Investment Risk," 2012 Meeting Papers, Society for Economic Dynamics 732, Society for Economic Dynamics.
  2. Dominique Henriet & Patrick Pintus & Alain Trannoy, 2014. "Is the Flat Tax Optimal under Income Risk?," AMSE Working Papers, Aix-Marseille School of Economics, Marseille, France 1420, Aix-Marseille School of Economics, Marseille, France, revised 30 May 2014.
  3. Cremer, H. & Pestieau, P., . "Redistributive taxation and social insurance," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1235, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Hsu, Minchung & Yang, C.C., 2013. "Optimal linear and two-bracket income taxes with idiosyncratic earnings risk," Journal of Public Economics, Elsevier, Elsevier, vol. 105(C), pages 58-71.
  5. Chamley, Christophe, 2001. "Capital income taxation, wealth distribution and borrowing constraints," Journal of Public Economics, Elsevier, Elsevier, vol. 79(1), pages 55-69, January.
  6. Sanjit Dhami, 2002. "Optimal Consumption Taxes and Social Security Under Tax Measurement Problems and Uncertainty," International Tax and Public Finance, Springer, Springer, vol. 9(6), pages 673-685, November.
  7. Kaplow, Louis, 1996. "How Tax Complexity and Enforcement Affect the Equity and Efficiency of the Income Tax," National Tax Journal, National Tax Association, National Tax Association, vol. 49(1), pages 135-50, March.
  8. Louis Kaplow, 1995. "How Tax Complexity and Enforcement Affect the Equity and Efficiency of The Income Tax," NBER Working Papers 5391, National Bureau of Economic Research, Inc.
  9. Louis Kaplow, 2007. "Optimal income transfers," International Tax and Public Finance, Springer, Springer, vol. 14(3), pages 295-325, June.
  10. Thomas Eichner & Andreas Wagener, 2004. "The Welfare State in a Changing Environment," International Tax and Public Finance, Springer, Springer, vol. 11(3), pages 313-331, 05.
  11. Jean-Baptiste Michau, 2013. "On the Provision of Insurance Against Search-Induced Wage Fluctuations," Working Papers, HAL hal-00850547, HAL.
  12. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty and optimal taxation: In defense of commodity taxes," Journal of Public Economics, Elsevier, Elsevier, vol. 56(2), pages 291-310, February.

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