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Negative Marginal Tax Rates and Heterogeneity

  • Philippe Chone
  • Guy Laroque

Heterogeneity is an important determinant of the shape of optimal tax schemes. This is shown here in a model a la Mirrlees. The agents differ in their productivities and opportunity costs of work, but their labor supplies depend only on a given unidimensional combination of these two characteristics. Conditions are provided under which marginal tax rates are everywhere nonnegative. This is the case when work opportunity costs are distributed independently of income. But one can also get negative marginal tax rates, in particular at the bottom of the income distribution. A numerical illustration is given, based on UK data. (JEL H21, H24, H31, J22)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 100 (2010)
Issue (Month): 5 (December)
Pages: 2532-47

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Handle: RePEc:aea:aecrev:v:100:y:2010:i:5:p:2532-47
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  1. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
  2. BOADWAY, Robin & MARCHAND, Maurice & PESTIEAU , Pierre & RACIONERO, Maria del mar, . "Optimal redistribution with heterogeneous preferences for leisure," CORE Discussion Papers RP -1566, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Aaron S. Edlin & Chris Shannon, 1998. "Strict Single Crossing and the Strict Spence-Mirrlees Condition: A Comment on Monotone Comparative Statics," Econometrica, Econometric Society, vol. 66(6), pages 1417-1426, November.
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  7. Katherine Cuff, 1998. "Optimality of Workfare with Heterogeneous Preferences," Working Papers 968, Queen's University, Department of Economics.
  8. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
  9. 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.
  10. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
  11. Craig Brett & John A. Weymark, 2000. "Financing Education Using Optimal Redistributive Taxation," Vanderbilt University Department of Economics Working Papers 0038, Vanderbilt University Department of Economics, revised May 2001.
  12. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Rochet, Jean-Charles, 1987. "A necessary and sufficient condition for rationalizability in a quasi-linear context," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 191-200, April.
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