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On optimal non-linear income taxation: numerical results revisited

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  • Matti Tuomala

Abstract

Based on numerical simulations there seems to be a kind of consensus in the optimal tax literature that the marginal tax rate should fall rather than rise with income. Retaining the same formal structure as in Mirrlees (1971) this paper shows that this consensus is sensitive to a choice of the assumed form of utility of consumption. For the utility function quadratic in consumption optimum tax schedules look rather like those traditionally chosen by governments, i.e. the marginal tax rates rise with income.
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  • Matti Tuomala, 2010. "On optimal non-linear income taxation: numerical results revisited," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(3), pages 259-270, June.
    • Handle: RePEc:kap:itaxpf:v:17:y:2010:i:3:p:259-270
    DOI: 10.1007/s10797-009-9119-y
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    Cited by:

    1. Amedeo Piolatto & Gwenola Trotin, 2016. "Optimal Income Tax Enforcement under Prospect Theory," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(1), pages 29-41, February.
    2. Ugo Colombino & Nizamul Islam, 2020. "Combining microsimulation and optimization to identify optimal flexible tax-transfer rule," CHILD Working Papers Series 86 JEL Classification: H2, Centre for Household, Income, Labour and Demographic Economics (CHILD) - CCA.
    3. Rolf Aaberge & Ugo Colombino, 2005. "Designing Optimal Taxes With a Microeconometric Model of Household Labour Supply," Public Economics 0510013, University Library of Munich, Germany.
    4. Maciej Dudek & Paweł Dudek & Konrad Walczyk, 2023. "Optimal Labour Income Taxation in Poland: The Case of High-Income Earners," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1, pages 41-65.
    5. Oztek, Abdullah Selim, 2019. "A Characterization for Marginal Income Tax Schedules," MPRA Paper 103046, University Library of Munich, Germany, revised 02 Dec 2019.
    6. Bastani, Spencer & Blomquist, Sören & Micheletto, Luca, 2010. "Public Provision of Private Goods, Tagging and Optimal Income Taxation with Heterogeneity in Needs," Working Paper Series, Center for Fiscal Studies 2010:14, Uppsala University, Department of Economics.
    7. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2019. "Nonlinear and piecewise linear income taxation, and the subsidization of work-related goods," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(4), pages 806-834, August.
    8. Ugo Colombino & Nizamul Islam, 2021. "Combining microsimulation and optimization to identify optimal universalistic tax-transfer rule," LISER Working Paper Series 2021-06, Luxembourg Institute of Socio-Economic Research (LISER).
    9. Islam, Nizamul & Colombino, Ugo, 2018. "The case for NIT+FT in Europe. An empirical optimal taxation exercise," Economic Modelling, Elsevier, vol. 75(C), pages 38-69.
    10. Soumyanetra Munshi, 2011. "On existence of pure strategy equilibrium with endogenous income," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 37(1), pages 1-37, June.
    11. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2020. "Child Care Subsidies, Quality, and Optimal Income Taxation," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 1-37, November.
    12. Hsu, Minchung & Yang, C.C., 2013. "Optimal linear and two-bracket income taxes with idiosyncratic earnings risk," Journal of Public Economics, Elsevier, vol. 105(C), pages 58-71.
    13. Colombino Ugo & Locatelli Marilena & Narazani Edlira & O'Donoghue Cathal, 2010. "Alternative Basic Income Mechanisms: An Evaluation Exercise With a Microeconometric Model," Basic Income Studies, De Gruyter, vol. 5(1), pages 1-31, September.
    14. Bas Jacobs & Uwe Thuemmel, 2020. "Optimal Linear Income Taxation and Education Subsidies under Skill-Biased Technical Change," Tinbergen Institute Discussion Papers 20-085/VI, Tinbergen Institute.
    15. Rolf Aaberge & Ugo Colombino, 2018. "Structural Labour Supply Models and Microsimulation," International Journal of Microsimulation, International Microsimulation Association, vol. 11(1), pages 162-197.
    16. Nizamul Islam & Ugo Colombino, 2018. "The case for negative income tax with flat tax in Europe. An empirical optimal taxation exercise," Working Papers 454, ECINEQ, Society for the Study of Economic Inequality.
    17. Rolf Aaberge & Ugo Colombino, 2014. "Labour Supply Models," Contributions to Economic Analysis, in: Handbook of Microsimulation Modelling, volume 127, pages 167-221, Emerald Group Publishing Limited.
    18. Oztek, Abdullah Selim, 2013. "Externalities and Optimal Taxation: A Progressive Tax Case," MPRA Paper 104847, University Library of Munich, Germany, revised Sep 2013.
    19. O'Donoghue, Cathal & Colombino, Ugo & Narazani, Edlira & Locatelli, Marilena & Shima, Isilda, 2008. "Behavioural and welfare effects of basic income policies: a simulation for European countries," EUROMOD Working Papers EM5/08, EUROMOD at the Institute for Social and Economic Research.
    20. Colombino Ugo, 2012. "A microeconometric-computational approach to empirical optimal taxation: outline of a project," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201218, University of Turin.
    21. Thomas Bassetti & Luciano Greco, 2015. "Optimal Taxation and Productive Social Expenditure," "Marco Fanno" Working Papers 0196, Dipartimento di Scienze Economiche "Marco Fanno".

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    More about this item

    Keywords

    Optimal nonlinear tax; Numerical simulations; H21; D63;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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