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Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach

Author

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  • Kroft, Kory

    (University of Toronto)

  • Kucko, Kavan

    (Boston University)

  • Lehmann, Etienne

    (CRED, Université Panthéon Assas Paris 2)

  • Schmieder, Johannes F.

    (Boston University)

Abstract

We derive a sufficient statistics optimal tax formula in a general model that incorporates unemployment and endogenous wages, to study the shape of the tax and transfer system at the bottom of the distribution. The sufficient statistics are the macro employment response to taxation and the micro and macro participation responses. We estimate these statistics using policy variation from the U.S. tax and transfer system. Our results suggest that the optimal tax more closely resembles a Negative Income Tax than an Earned Income Tax Credit relative to the case where unemployment and wage responses are not taken into account.

Suggested Citation

  • Kroft, Kory & Kucko, Kavan & Lehmann, Etienne & Schmieder, Johannes F., 2016. "Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach," IZA Discussion Papers 9719, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp9719
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    More about this item

    Keywords

    labor supply; optimal income taxation; labor demand;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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