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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
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  1. Martin, Philippe & Rogers, Carol Ann, 1995. "Optimal Stabilization Policy in the Presence of Learning by Doing," CEPR Discussion Papers 1129, C.E.P.R. Discussion Papers.
  2. Marcus Berliant & John Ledyard, 2004. "Optimal Dynamic Nonlinear Income Taxes with No Commitment," Public Economics 0403004, EconWPA, revised 21 Jun 2005.
  3. Ted O'Donoghue & Matthew Rabin, 2005. "Optimal Sin Taxes," Levine's Bibliography 784828000000000346, UCLA Department of Economics.
  4. Craig Brett & John Weymark, 2007. "The Impact of Changing Skill Levels on Optimal Nonlinear Income Taxes," Vanderbilt University Department of Economics Working Papers 0708, Vanderbilt University Department of Economics.
  5. 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.
  6. Weymark, John A, 1987. "Comparative Static Properties of Optimal Nonlinear Income Taxes," Econometrica, Econometric Society, vol. 55(5), pages 1165-85, September.
  7. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  8. Auerbach, Alan J., 2006. "Budget windows, sunsets, and fiscal control," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 87-100, January.
  9. Craig Brett & John A. Weymark, 2008. "Public Good Provision And The Comparative Statics Of Optimal Nonlinear Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(1), pages 255-290, 02.
  10. 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.
  11. Laurent Simula, 2007. "Optimality conditions and comparative static properties of non-linear income taxes revisited," PSE Working Papers halshs-00588074, HAL.
  12. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
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