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Optimal Tax Problems with Multidimensional Heterogeneity: A Mechanism Design Approach

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  • Laurence Jacquet
  • Etienne Lehmann

Abstract

We propose a new method, that we call an allocation perturbation, to derive the optimal nonlinear income tax schedules with multidimensional individual characteristics on which taxes cannot be conditioned. It is well established that, when individuals differ in terms of preferences on top of their skills, optimal marginal tax rates can be negative. In contrast, we show that with heterogeneous behavioral responses and skills, one has optimal positive marginal tax rates, under utilitarian preferences and maximin.

Suggested Citation

  • Laurence Jacquet & Etienne Lehmann, 2021. "Optimal Tax Problems with Multidimensional Heterogeneity: A Mechanism Design Approach," CESifo Working Paper Series 8871, CESifo.
  • Handle: RePEc:ces:ceswps:_8871
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    References listed on IDEAS

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    Keywords

    optimal taxation; mechanism design; multidimensional screening problems; allocation perturbation;
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