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Optimal redistributive taxation with both extensive and intensive responses

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  • Jacquet, Laurence
  • Lehmann, Etienne
  • Van der Linden, Bruno

Abstract

We study optimal income taxation when labor supply reacts along the intensive and extensive margins. Individuals are heterogeneous across two unobserved dimensions: their skill and disutility of participation. We develop a new method to analytically derive conditions under which optimal marginal tax rates are non-negative everywhere. It is typically optimal to provide a distinct level of transfer to the non-employed and to workers with negligible earnings. Numerical simulations illustrate these properties for the US. We also apply our method to sign output distortions in other adverse selection frameworks with random participation, namely the monopoly nonlinear pricing and the regulatory monopoly problems.

Suggested Citation

  • Jacquet, Laurence & Lehmann, Etienne & Van der Linden, Bruno, 2013. "Optimal redistributive taxation with both extensive and intensive responses," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1770-1805.
  • Handle: RePEc:eee:jetheo:v:148:y:2013:i:5:p:1770-1805 DOI: 10.1016/j.jet.2013.07.019
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    Keywords

    Optimal taxation; Intensive margin; Extensive margin; Marginal tax rates; Random participation;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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