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Optimal Redistributive Taxation with Both Extensive and Intensive Responses

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  • Jacquet, Laurence

    ()
    (Norwegian School of Economics)

  • Lehmann, Etienne

    ()
    (CRED, Université Panthéon Assas Paris 2)

  • Van der Linden, Bruno

    ()
    (IRES, Université catholique de Louvain)

Abstract

This paper characterizes optimal income taxation when individuals respond along both the intensive and extensive margins. Individuals are heterogeneous across two dimensions: specifically, their skill and disutility of participation. Preferences over consumption and work effort can differ with respect to the level of skill, with only the Spence-Mirrlees condition imposed. Employing a tax perturbation approach, we derive an optimal tax formula that 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. We discuss the relevance of this condition with analytical examples and numerical simulations using U.S. data.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4837.

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Length: 35 pages
Date of creation: Mar 2010
Date of revision:
Publication status: published in: Journal of Economic Theory, 2013, 148(5), 1770-1805.
Handle: RePEc:iza:izadps:dp4837

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Keywords: random participation; tax perturbation; optimal tax formula;

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Cited by:
  1. 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.
  2. Lehmann, Etienne & Simula, Laurent & Trannoy, Alain, 2013. "Tax Me If You Can! Optimal Nonlinear Income Tax between Competing Governments," IZA Discussion Papers 7646, Institute for the Study of Labor (IZA).
  3. Lehmann, Etienne & Parmentier, Alexis & Van Der Linden, Bruno, 2011. "Optimal income taxation with endogenous participation and search unemployment," Journal of Public Economics, Elsevier, Elsevier, vol. 95(11), pages 1523-1537.
  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. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, IEF, vol. 200(1), pages 15-39, March.
  6. 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.
  7. Michau, Jean-Baptiste, 2014. "Optimal redistribution: A life-cycle perspective," Journal of Public Economics, Elsevier, Elsevier, vol. 111(C), pages 1-16.
  8. 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.
  9. 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.
  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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