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Optimal Piecewise Linear Income Taxation

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  • Patricia Apps
  • Ngo Van Long
  • Ray Rees

Abstract

Given its signiÖcance in practice, piecewise linear taxation has received relatively little attention in the literature. This paper o§ers a simple and transparent analysis of its main characteristics. We fully characterize optimal tax parameters for the cases in which budget sets are convex and nonconvex respectively. A numerical analysis of a discrete version of the model shows the circumstances under which each of these cases will hold as a global optimum. We Önd that, given plausible parameter values and wage distributions, the globally optimal tax system is convex, and marginal rate progressivity increases with rising inequality.

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Bibliographic Info

Paper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 655.

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Date of creation: Dec 2011
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Handle: RePEc:auu:dpaper:655

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Keywords: piecewise linear; income; taxation;

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References

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  1. Dahlby, Bev, 1998. "Progressive taxation and the social marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 67(1), pages 105-122, January.
  2. Patricia Apps & Ray Rees, 2010. "Australian Family Tax Reform and the Targeting Fallacy," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 43(2), pages 153-175.
  3. Slemrod, Joel & Yitzhaki, Shlomo & Mayshar, Joram & Lundholm, Michael, 1994. "The optimal two-bracket linear income tax," Journal of Public Economics, Elsevier, vol. 53(2), pages 269-290, February.
  4. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  5. 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 165-90, Fall.
  6. Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042509, December.
  7. Apps,Patricia & Rees,Ray, 2009. "Public Economics and the Household," Cambridge Books, Cambridge University Press, number 9780521716284, Fall.
  8. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 297-302, July.
  9. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Wiley Blackwell, vol. 68(1), pages 205-29, January.
  10. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 3-71, March.
  11. Sheshinski, Eytan, 1989. "Note on the shape of the optimum income tax schedule," Journal of Public Economics, Elsevier, vol. 40(2), pages 201-215, November.
  12. Robin Boadway, 1998. "The Mirrlees Approach to the Theory of Economic Policy," International Tax and Public Finance, Springer, vol. 5(1), pages 67-81, February.
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Citations

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Cited by:
  1. Patricia Apps & Ray Rees, 2010. "Family labor supply, taxation and saving in an imperfect capital market," Review of Economics of the Household, Springer, vol. 8(3), pages 297-323, September.
  2. Patricia Apps & Ray Rees, 2012. "Optimal Taxation, Child Care and Models of the Household," CEPR Discussion Papers 673, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  3. Patricia Apps & Ray Rees, 2011. "Relational Contracts, Taxation and the Household," CESifo Economic Studies, CESifo, vol. 57(2), pages 245-258, June.
  4. Andrienko, Yuri & Apps, Patricia & Rees, Ray, 2014. "Optimal Taxation, Inequality and Top Incomes," IZA Discussion Papers 8275, Institute for the Study of Labor (IZA).
  5. Yuri Andrienko & Patricia Apps & Ray Rees, 2014. "Optimal Taxation, Inequality and Top Incomes," CEPR Discussion Papers 690, Centre for Economic Policy Research, Research School of Economics, Australian National University.

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