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Tax Design for the Long Run

Author

Listed:
  • Musab Kurnaz
  • Martin Michelini
  • Hakkı Özdenören
  • Christopher Sleet

Abstract

Costs of adjustment hinder behavioral responses to tax changes. To capture these dynamics, we integrate a discrete choice framework into optimal tax theory. Long-run outcomes are identified with stationary distributions of workers across income-generating states, and optimal tax equations are expressed through the sensitivity of these distributions to consumption variation. We derive formulas that enable quantitative evaluation of substitution patterns. Novel equations establish marginal costs of inducing long-run population movements across states as sufficient statistics for optimal taxation. We analyze the implications of quantitative models of occupational and income choice for the design of optimal taxes.

Suggested Citation

  • Musab Kurnaz & Martin Michelini & Hakkı Özdenören & Christopher Sleet, 2026. "Tax Design for the Long Run," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 4(1), pages 1-47.
    • Handle: RePEc:ucp:jpemac:doi:10.1086/739341
    DOI: 10.1086/739341
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