Optimal Nonlinear Income Taxation with Learning-by-Doing
AbstractThis paper examines a two-period model of optimal nonlinear income taxation with learning-by-doing, in which second-period wages are an increasing function of first-period labour supply. We consider the cases when the government can and cannot commit to its second-period tax policy. In both cases, the canonical Mirrlees/Stiglitz results regarding optimal marginal tax rates no longer apply. In particular, if the government cannot commit and skill-type information is revealed, it is optimal to distort the high-skill consumer's labour supply downwards through a positive marginal tax rate to relax the incentive-compatibility constraint. Alternatively, if the government cannot commit and skill-type information is concealed, it is optimal to distort the high-skill consumer's labour supply upwards to relax the incentive-compatibility constraint, but due to some other factors at work the high-skill consumer's marginal tax rate cannot be signed. Our analysis therefore identifies a setting in which a positive marginal tax rate on the highest-skill individual can be justified, despite its depressing effect on labour supply and wages.
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 08/08.
Date of creation: May 2008
Date of revision:
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More information through EDIRC
Income taxation; learning-by-doing; commitment.;
Find related papers by JEL classification:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-17 (All new papers)
- NEP-CTA-2008-05-17 (Contract Theory & Applications)
- NEP-DGE-2008-05-17 (Dynamic General Equilibrium)
- NEP-LAB-2008-05-17 (Labour Economics)
- NEP-PUB-2008-05-17 (Public Finance)
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