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Taxing Uncertain Incomes

  • Mirrlees, J A

This paper studies nearly optimal income taxation when individuals are uncertain about their wages and when the government observes individual income with errors. Given the distribution of observed wage rates, it asks how the proportion of inequality known ex ante to individuals, or the proportion of observed inequality due to errors of observation, should affect optimal taxes. The taxes compared are nearly optimal for small inequality. First approximations to optimal taxes are found for these problems and also for the many-good optimal commodity tax problems. Among other results, it is found that wage uncertainty usually decreases the optimal earnings-tax rate and that errors of observation always do. Copyright 1990 by Royal Economic Society.

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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 42 (1990)
Issue (Month): 1 (January)
Pages: 34-45

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Handle: RePEc:oup:oxecpp:v:42:y:1990:i:1:p:34-45
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