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Optimal Redistributive Taxation with both Extensive and Intensive Responses

Author

Listed:
  • Jacquet, Laurence

    (Dept. of Economics, Norwegian School of Economics and Business Administration)

  • Lehmann, Etienne

    (CREST-INSEE)

  • Van der Linden, Bruno

    (IRES)

Abstract

This paper characterizes the optimal income taxation when individuals respond along both the intensive and extensive margins. Individuals are heterogeneous in two dimensions: their skills and their disutility of participation. Preferences over consumption and work effort can differ with the skill level, only the Spence-Mirrlees condition being imposed. We derive an optimal tax formula thanks to a tax perturbation approach. This formula generalizes previous results by allowing for income effects and extensive margin responses. We provide a sufficient condition for optimal marginal tax rates to be nonnegative everywhere. The relevance of this condition is discussed with analytical examples and numerical simulations on U.S. data.

Suggested Citation

  • Jacquet, Laurence & Lehmann, Etienne & Van der Linden, Bruno, 2010. "Optimal Redistributive Taxation with both Extensive and Intensive Responses," Discussion Paper Series in Economics 7/2010, Norwegian School of Economics, Department of Economics.
    • Handle: RePEc:hhs:nhheco:2010_007
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    More about this item

    Keywords

    Optimal Tax formula; Tax perturbation; Random participation.;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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