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Optimal nonlinear income taxation with learning-by-doing

  • Krause, Alan

This 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 generally no longer apply. In particular, if the government cannot commit and each consumer's skill-type is revealed, it is optimal to distort the high-skill type's labour supply downwards through a positive marginal tax rate to relax an incentive-compatibility constraint. 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 both labour supply and wages.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 93 (2009)
Issue (Month): 9-10 (October)
Pages: 1098-1110

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Handle: RePEc:eee:pubeco:v:93:y:2009:i:9-10:p:1098-1110
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Craig Brett & John A. Weymark, 2004. "Public Good Provision and the Comparative Statics of Optimal Nonlinear Income Taxation," Vanderbilt University Department of Economics Working Papers 0415, Vanderbilt University Department of Economics.
  2. Ted O'Donoghue & Matthew Rabin, 2005. "Optimal Sin Taxes," Levine's Bibliography 784828000000000346, UCLA Department of Economics.
  3. Laurent Simula, 2007. "Optimality conditions and comparative static properties of non-linear income taxes revisited," PSE Working Papers halshs-00588074, HAL.
  4. Robin, BOADWAY & Laurence, JACQUET, 2006. "Optimal Marginal and Average Income Taxation under Maxi-min," Discussion Papers (ECON - Département des Sciences Economiques) 2006020, Université catholique de Louvain, Département des Sciences Economiques.
  5. Thomas Gaube, 2007. "Optimum Taxation of Each Year's Income," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(1), pages 127-150, 02.
  6. Alan J. Auerbach, 2004. "Budget Windows, Sunsets, and Fiscal Control," NBER Working Papers 10694, National Bureau of Economic Research, Inc.
  7. Martin, Philippe & Rogers, Carol Ann, 2000. " Optimal Stabilization Policy in the Presence of Learning by Doing," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(2), pages 213-41.
  8. Brett, Craig & Weymark, John A., 2008. "The impact of changing skill levels on optimal nonlinear income taxes," Journal of Public Economics, Elsevier, vol. 92(7), pages 1765-1771, July.
  9. Marcus Berliant & John Ledyard, 2004. "Optimal Dynamic Nonlinear Income Taxes with No Commitment," Public Economics 0403004, EconWPA, revised 21 Jun 2005.
  10. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
  11. Craig Brett & John Weymark, 2008. "Optimal Nonlinear Taxation of Income and Savings without Commitment," Vanderbilt University Department of Economics Working Papers 0805, Vanderbilt University Department of Economics.
  12. Weymark, John A, 1987. "Comparative Static Properties of Optimal Nonlinear Income Taxes," Econometrica, Econometric Society, vol. 55(5), pages 1165-85, September.
  13. 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.
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