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Optimal Marginal Tax Rates for Low Incomes: Positive, Negative, or Zero?

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  • Homburg, Stefan

Abstract

Previous studies have shown that the optimal marginal tax rate at the bottom of the income distribution may be positive, negative, or even zero. This paper reexamines this problem in a unified framework and tries to evaluate the arguments. It turns out that the case for positive marginal tax rates is quite strong, whereas negative marginal tax rates seem to be based on a misconception.

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File URL: http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-255.pdf
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Bibliographic Info

Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-255.

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Length: 15 pages
Date of creation: May 2002
Date of revision:
Handle: RePEc:han:dpaper:dp-255

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Related research

Keywords: Optimal income taxation; contract theory; incentives; welfare;

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References

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  1. V. Joseph Hotz, 2003. "The Earned Income Tax Credit," NBER Chapters, in: Means-Tested Transfer Programs in the United States, pages 141-198 National Bureau of Economic Research, Inc.
  2. Joseph E. Stiglitz, 1982. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
  3. Kanbur, Ravi & Tuomala, Matti, 1994. " Inherent Inequality and the Optimal Graduation of Marginal Tax Rates," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(2), pages 275-82.
  4. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1039-1073, August.
  5. Stefan Homburg, 2001. "The Optimal Income Tax: Restatement and Extensions," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(4), pages 363-395, November.
  6. Guesnerie, Roger & Seade, Jesus, 1982. "Nonlinear pricing in a finite economy," Journal of Public Economics, Elsevier, vol. 17(2), pages 157-179, March.
  7. 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.
  8. Browning, Edgar K., 1995. "Effects of the Earned Income Tax Credit on Income and Welfare," National Tax Journal, National Tax Association, vol. 48(1), pages 23-43, March.
  9. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
  10. Seade, Jesus, 1982. "On the Sign of the Optimum Marginal Income Tax," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 637-43, October.
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Citations

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Cited by:
  1. Kessing, Sebastian G. & Konrad, Kai A., 2005. "Union Strategy and Optimal Income Taxation," IZA Discussion Papers 1545, Institute for the Study of Labor (IZA).
  2. Stefan Homburg & Tim Lohse, 2005. "Optimal Taxes and Transfers under Partial Information," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 225(6), pages 622-629, November.
  3. Phillippe Choné & Guy Laroque, 2008. "Optimal taxation in the extensive model," IFS Working Papers W08/08, Institute for Fiscal Studies.
  4. Johann K. Brunner, 2003. "Optimale direkte und indirekte Steuern bei unterschiedlicher Anfangsausstattung," Economics working papers 2003-10, Department of Economics, Johannes Kepler University Linz, Austria.
  5. Kessing, Sebastian G. & Konrad, Kai A., 2006. "Union strategy and optimal direct taxation," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 393-402, January.

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