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Variable Earnings and Nonlinear Taxation

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  • Robert Moffitt
  • Michael Rothschild

Abstract

Tax and transfer programs transform before-tax income into after-tax income. Income is variable and the tax and transfer system is nonlinear-i.e., marginal tax rates vary. We show that, as a consequence, the tax and transfer system punishes (and rewards) income variability. We calculate the effect of the nonlinearity for several components of the U.S. tax and transfer system, focusing on the low-income population. We find that the system rewards variability for some individuals and penalizes it for others. We conclude that the tax and transfer system punishes and rewards variability in a manner that is both substantial and capricious.

Suggested Citation

  • Robert Moffitt & Michael Rothschild, 1987. "Variable Earnings and Nonlinear Taxation," Journal of Human Resources, University of Wisconsin Press, vol. 22(3), pages 405-421.
  • Handle: RePEc:uwp:jhriss:v:22:y:1987:i:3:p:405-421
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    References listed on IDEAS

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    1. Lillard, Lee A & Willis, Robert J, 1978. "Dynamic Aspects of Earning Mobility," Econometrica, Econometric Society, vol. 46(5), pages 985-1012, September.
    2. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
    3. Hausman, Jerry A & Wise, David A, 1979. "Attrition Bias in Experimental and Panel Data: The Gary Income Maintenance Experiment," Econometrica, Econometric Society, vol. 47(2), pages 455-473, March.
    4. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
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    Cited by:

    1. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-399, April.

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