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Optimal Redistributive Taxation with both Extensive and Intensive Responses

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  • Laurence Jacquet

    (Crest)

  • Etienne Lehmann

    (Crest)

  • Bruno Van Der Linden

    (Crest)

Abstract

We derive a general optimal income tax formula when individuals respond along both the intensiveand extensive margins and when income effects can prevail. Individuals are heterogeneous across twodimensions: their skill and their disutility of participation. Preferences over consumption and workeffort can differ with respect to the level of skill, with only the Spence-Mirrlees condition beingimposed. Employing a new tax perturbation approach that integrates the nonlinearity of the taxfunction into the behavioral elasticities, we derive a fairly mild condition for optimal marginal taxrates to be nonnegative everywhere. Numerical simulations using U.S. data confirm the mildness ofour conditions. The extensive margin strongly reduces the level of optimal marginal tax rates

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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2010-15.

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Length: 41
Date of creation: 2010
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Handle: RePEc:crs:wpaper:2010-15

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Cited by:
  1. Etienne Lehmann & Laurent Simula & Alain Trannoy, 2014. "Tax Me if You Can! Optimal Nonlinear Income Tax between Competing Governments," AMSE Working Papers 1415, Aix-Marseille School of Economics, Marseille, France, revised 14 May 2014.
  2. Jacobs, Bas, 2011. "The Marginal Cost of Public Funds is One," Working Paper Series, Center for Fiscal Studies 2011:7, Uppsala University, Department of Economics.
  3. Etienne, LEHMANN & Alexis, PARMENTIER & Bruno, VAN DER LINDEN, 2008. "Optimal income taxation with endogenous participation and search unemployment," Discussion Papers (ECON - Département des Sciences Economiques) 2008036, Université catholique de Louvain, Département des Sciences Economiques.
  4. Laurence JACQUET & Etienne LEHMANN, 2014. "Optimal Nonlinear Income Taxation with Multidimensional Types: The Case with Heterogeneous Behavioral Responses," THEMA Working Papers 2014-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  5. Findeisen, Sebastian & Sachs, Dominik, 2014. "Efficient Labor and Capital Income Taxation over the Life Cycle," Working Papers 14-17, University of Mannheim, Department of Economics.
  6. Normann Lorenz & Dominik Sachs, 2011. "Optimal Nonlinear Taxation, Minimum Hours, and the Earned Income Tax Credit," Research Papers in Economics 2011-11, University of Trier, Department of Economics.
  7. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, vol. 200(1), pages 15-39, March.
  8. Michau, Jean-Baptiste, 2014. "Optimal redistribution: A life-cycle perspective," Journal of Public Economics, Elsevier, vol. 111(C), pages 1-16.
  9. Bas Jacobs & Ruud A. de Mooij, 2011. "Pigou Meets Mirrlees: On the Irrelevance of Tax Distortions for the Second-Best Pigouvian Tax," CESifo Working Paper Series 3342, CESifo Group Munich.
  10. Laurence Jacquet & Craig Brett, 2012. "Workforce or Workfare? The Optimal Use of Work Requirements when Labor is Supplied along the Extensive Margin," THEMA Working Papers 2012-40, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  11. Bas Jacobs, 2013. "From Optimal Tax Theory to Applied Tax Policy," CESifo Working Paper Series 4151, CESifo Group Munich.

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