How are optimal taxation rules affected when households differ in their non-market, as well as in their market skills? Where income taxation is concerned, the policy prescription applying in the case where households are differentiated only by wage rate (namely, that high-wage households should be taxed more than low-wage households, but that marginal income tax rate on the former should be zero) may be reversed when there are also differences in household production skills. Such a reversal is not very likely, however, because there are efficiency gains in subsidizing households with a comparative advantage in non-market activities. Indeed, simulations with a wide range of parameter values show that redistribution is always in favour of low-wage households, and that the amount redistributed increases with the non-market skills of the latter. If households differ in both market and non-market skills, we also find that the introduction of indirect taxation alongside income taxation my be welfare-improving, because it helps relax the incentive constraint, even when the utility function is separable in labour. This contradicts the Atkinson-Stiglitz theorem. The shift from direct to indirect taxation/subsidization allows the optimal marginal rate of income tax on potential mimickers to be different from zero. This is confirmed by simulation experiments.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number
CESifo Working Paper No. 181.
Length: Date of creation: 1999 Date of revision: Handle: RePEc:ces:ceswps:_181
Contact details of provider: Postal: Poschingerstrasse 5, 81679 Munich Phone: +49 (89) 9224-0 Fax: +49 (89) 985369 Web page: http://www.cesifo.de
For technical questions regarding this item, or to correct its listing, contact: (Julio Saavedra).
Related research
Keywords:
Other versions of this item:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)