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Optimal Redistributive Taxation with both Extensive and Intensive Responses

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  • Laurence JACQUET

    ()
    (Norvegian School of Economics and Business Administration , CESifo, Hoover Chair and IRES - Université Catholique de Louvain)

  • Etienne LEHMANN

    ()
    (CREST-INSEE, IRES - Université Catholique de Louvain, IZA and IDEP)

  • Bruno VAN DER LINDEN

    ()
    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Center for Operations Research and Econometrics (CORE))

Abstract

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

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2010033.

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Length: 39
Date of creation: 02 Sep 2010
Date of revision:
Handle: RePEc:ctl:louvir:2010033

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Keywords: Optimal tax formula; Tax perturbation; Random participation;

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Citations

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Cited by:
  1. Findeisen, Sebastian & Sachs, Dominik, 2014. "Efficient Labor and Capital Income Taxation over the Life Cycle," Working Papers, University of Mannheim, Department of Economics 14-17, University of Mannheim, Department of Economics.
  2. Etienne Lehmann & Alexis Parmentier & Bruno Van Der Linden, 2008. "Optimal Income Taxation with Endogenous Participation and Search Unemployment," Documents de recherche, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne 08-16, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  3. Etienne Lehmann & Laurent Simula & Alain Trannoy, 2013. "Tax Me If You Can! Optimal Nonlinear Income Tax between Competing Governments," CESifo Working Paper Series 4351, CESifo Group Munich.
  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. Bas Jacobs, 2010. "The Marginal Cost of Public Funds is One," CESifo Working Paper Series 3250, CESifo Group Munich.
  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, IEF, vol. 200(1), pages 15-39, March.
  8. 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.
  9. Michau, Jean-Baptiste, 2014. "Optimal redistribution: A life-cycle perspective," Journal of Public Economics, Elsevier, Elsevier, vol. 111(C), pages 1-16.
  10. 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.
  11. Bas Jacobs, 2013. "From Optimal Tax Theory to Applied Tax Policy," CESifo Working Paper Series 4151, CESifo Group Munich.

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