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Redistributive Taxation in the Roy Model

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  • Casey Rothschild
  • Florian Scheuer

Abstract

We consider optimal redistribution in a model where individuals can self-select into one of several possible sectors based on heterogeneity in a multidimensional skill vector. We first show that when the government does not observe the sectoral choice or underlying skills of its citizens, the constrained Pareto frontier can be implemented with a single nonlinear income tax. We then characterize this optimal tax schedule. If sectoral inputs are complements, a many-sector model with self-selection leads to optimal income taxes that are less progressive than the corresponding taxes in a standard single-sector model under natural conditions. However, they are more progressive than in canonical multisector economies with discrete types and without occupational choice or overlapping sectoral wage distributions. JEL Codes: H2, D5, D8, E2, E6, J3, J6. Copyright 2013, Oxford University Press.

Suggested Citation

  • Casey Rothschild & Florian Scheuer, 2013. "Redistributive Taxation in the Roy Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 623-668.
    • Handle: RePEc:oup:qjecon:v:128:y:2013:i:2:p:623-668
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    File URL: http://hdl.handle.net/10.1093/qje/qjs076
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    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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