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Optimal Piecewise Linear Income Taxation

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Author Info

  • Apps, Patricia

    ()
    (University of Sydney)

  • Long, Ngo Van

    ()
    (McGill University)

  • Rees, Ray

    ()
    (University of Munich)

Abstract

Given its significance in practice, piecewise linear taxation has received relatively little attention in the literature. This paper offers a simple and transparent analysis of its main characteristics. We fully characterize optimal tax parameters for the cases in which budget sets are convex and nonconvex respectively. A numerical analysis of a discrete version of the model shows the circumstances under which each of these cases will hold as a global optimum. We find that, given plausible parameter values and wage distributions, the globally optimal tax system is convex, and marginal rate progressivity increases with rising inequality.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6007.

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Length: 33 pages
Date of creation: Oct 2011
Date of revision:
Publication status: published in: Journal of Public Economic Theory, 2014, 16 (4), 523-545
Handle: RePEc:iza:izadps:dp6007

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Keywords: income; piecewise linear; taxation;

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References

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  1. Peter Diamond & Emmanuel Saez, 2011. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 165-90, Fall.
  2. Robin Boadway, 1998. "The Mirrlees Approach to the Theory of Economic Policy," International Tax and Public Finance, Springer, vol. 5(1), pages 67-81, February.
  3. Apps,Patricia & Rees,Ray, 2009. "Public Economics and the Household," Cambridge Books, Cambridge University Press, number 9780521716284, October.
  4. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 3-71, March.
  5. Patricia Apps & Ray Rees, 2010. "Australian Family Tax Reform and the Targeting Fallacy," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 43(2), pages 153-175.
  6. 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.
  7. Emmanuel Saez, 2000. "Using Elasticities to Derive Optimal Income Tax Rates," NBER Working Papers 7628, National Bureau of Economic Research, Inc.
  8. Sheshinski, Eytan, 1989. "Note on the shape of the optimum income tax schedule," Journal of Public Economics, Elsevier, vol. 40(2), pages 201-215, November.
  9. Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042509, December.
  10. Dahlby, Bev, 1998. "Progressive taxation and the social marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 67(1), pages 105-122, January.
  11. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 297-302, July.
  12. Slemrod, Joel & Yitzhaki, Shlomo & Mayshar, Joram & Lundholm, Michael, 1994. "The optimal two-bracket linear income tax," Journal of Public Economics, Elsevier, vol. 53(2), pages 269-290, February.
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Cited by:
  1. Patricia Apps & Ray Rees, 2014. "Optimal Taxation, Child Care and Models of the Household," CESifo Working Paper Series 4578, CESifo Group Munich.
  2. Patricia Apps & Ray Rees, 2011. "Relational Contracts, Taxation and the Household," CESifo Economic Studies, CESifo, vol. 57(2), pages 245-258, June.
  3. Patricia Apps & Ray Rees, 2010. "Family labor supply, taxation and saving in an imperfect capital market," Review of Economics of the Household, Springer, vol. 8(3), pages 297-323, September.

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