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Optimal income taxation with a stationarity constraint in a dynamic stochastic economy

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  • Marcus Berliant
  • Shota Fujishima

Abstract

We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government cannot change the tax rule as uncertainty resolves. Due to such a stationarity constraint, our taxation problem is reduced to a static one over an expanded type space. We strengthen the argument in the static model that the zero top marginal tax rate result is of little practical importance because it is actually relevant only when the top earner in the initial period receives the highest shock in every subsequent period. Under a general stochastic structure such that the support of types moves over time, all people’s allocations are almost surely distorted in any period.
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Suggested Citation

  • Marcus Berliant & Shota Fujishima, 2017. "Optimal income taxation with a stationarity constraint in a dynamic stochastic economy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(3), pages 739-747, June.
    • Handle: RePEc:bla:jpbect:v:19:y:2017:i:3:p:739-747
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    File URL: http://hdl.handle.net/10.1111/jpet.2017.19.issue-3
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    Cited by:

    1. Takao Kataoka & Yoshihiro Takamatsu, 2024. "Optimal labor income taxation and asset distribution in an economy with no insurance market and extensive labor supply responses," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(6), pages 1611-1639, December.

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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