What Should Optimal Income Taxes Smooth?
According to the theory of tax smoothing, income tax rates should be kept constant so as to minimize the distortionary costs of taxation. By explicitly considering how labor supply is distorted by income taxes in a fully specified intertemporal model, we find that the optimal income tax policy should smoothen leisure. In the case of varying income (productivity changes) this is attained by a pro-cyclical (progressive) tax rate. Copyright 2004 Blackwell Publishing Inc..
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Volume (Year): 6 (2004)
Issue (Month): 3 (08)
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