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Optimal Income Taxation with Uncertain Earnings: A Synthesis

  • Robin Boadway
  • Motohiro Sato

We study optimal nonlinear income taxation when earnings can differ because of both ability and luck, so the income tax has both a redistributive role and an insurance role. A substantial literature on optimal redistribution in the absence of uncertainty has evolved since Mirrlees’ original contribution. The literature on the income tax as a social insurance device is more limited. It has largely assumed that households are ex ante identical so unequal earnings are due to uncertainty alone. We provide a general treatment of the optimal income tax under uncertainty when households differ in ability. We characterize optimal marginal tax rates and interpret them in terms of redistribution, insurance and incentive effects. The case of ex ante identical households and the no-risk case with heterogeneous abilities come out as special cases.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3654.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3654
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  1. Dirk Schindler & Hongyan Yang, 2010. "Catalysts for Social Insurance: Education Subsidies vs. Real Capital Taxation," CESifo Working Paper Series 3278, CESifo Group Munich.
  2. Ravi Kanbur & Jukka Pirttilä & Matti Tuomala, 2008. "Moral Hazard, Income Taxation and Prospect Theory," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 321-337, 06.
  3. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
  4. Conesa, Juan Carlos & Kitao, Sagiri & Krueger, Dirk, 2006. "Taxing Capital? Not a Bad Idea After All!," CEPR Discussion Papers 5929, C.E.P.R. Discussion Papers.
  5. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty, Optimal Taxation and the Direct versus Indirect Tax Controversy," Economic Journal, Royal Economic Society, vol. 105(432), pages 1165-79, September.
  6. BOADWAY, R. & MARCHAND, M. & PESTIEAU, P. & del MAR RACIONERO, M., 2001. "Optimal redistribution with heterogeneous preferences for leisure," CORE Discussion Papers 2001025, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Marc Fleurbaey & Francois Maniquet, 2002. "Fair Income Tax," Economics Working Papers 0021, Institute for Advanced Study, School of Social Science.
  8. Bas Jacobs & Dirk Schindler & Hongyan Yang, 2009. "Optimal Taxation of Risky Human Capital," CESifo Working Paper Series 2529, CESifo Group Munich.
  9. Robin, BOADWAY & Laurence, JACQUET, 2006. "Optimal Marginal and Average Income Taxation under Maxi-min," Discussion Papers (ECON - Département des Sciences Economiques) 2006020, Université catholique de Louvain, Département des Sciences Economiques.
  10. Anderberg, Dan & Andersson, Fredrik, 2003. "Investments in human capital, wage uncertainty, and public policy," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1521-1537, August.
  11. repec:cup:cbooks:9780521497695 is not listed on IDEAS
  12. Cremer, Helmuth & Gahvari, Firouz, 1999. " Uncertainty, Commitment, and Optimal Taxation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(1), pages 51-70.
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