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Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach

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  • Kroft, Kory
  • Kucko, Kavan
  • Lehmann, Etienne
  • Schmieder, Johannes

Abstract

We derive a sufficient statistics optimal income tax formula in a general model that incorporates unemployment and endogenous wages, to study the shape of the tax and transfer system at the bottom of the income distribution. The sufficient statistics are the macro employment response to taxation and the micro and macro participation responses. We estimate these statistics using policy variation from the U.S. tax and transfer system. Our results suggest that the optimal tax more closely resembles a Negative Income Tax than an Earned Income Tax Credit relative to the case where unemployment and wage responses are not taken into account.

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  • Kroft, Kory & Kucko, Kavan & Lehmann, Etienne & Schmieder, Johannes, 2017. "Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach," CEPR Discussion Papers 12328, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12328
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    Cited by:

    1. Laurence Jacquet & Etienne Lehmann, 2018. "Optimal income taxation with composition effects," Working Papers halshs-01878488, HAL.
    2. Laurence Jacquet & Etienne Lehmann, 2017. "Optimal Income Taxation with Composition Effects," CESifo Working Paper Series 6654, CESifo Group Munich.
    3. Albert Jan Hummel & Bas Jacobs, 2018. "Optimal Income Taxation in Unionized Labor Markets," Tinbergen Institute Discussion Papers 18-064/VI, Tinbergen Institute.
    4. Jones, Damon & Marinescu, Ioana E., 2018. "The Labor Market Impacts of Universal and Permanent Cash Transfers: Evidence from the Alaska Permanent Fund," IZA Discussion Papers 11356, Institute for the Study of Labor (IZA).
    5. Aart Gerritsen, 2016. "Equity and Efficiency in Rationed Labor Markets," Working Papers tax-mpg-rps-2016-04, Max Planck Institute for Tax Law and Public Finance.
    6. Islam, Nizamul & Colombino, Ugo, 2017. "The Case for NIT+FT in Europe: An Empirical Optimal Taxation Exercise," IZA Discussion Papers 11147, Institute for the Study of Labor (IZA).
    7. Adam M. Lavecchia, 2018. "Minimum Wage Policy with Optimal Taxes and Unemployment," Working Papers 1801E, University of Ottawa, Department of Economics.
    8. Albert Jan Hummel & Bas Jacobs, 2018. "Optimal Income Taxation in Unionized Labor Markets," CESifo Working Paper Series 7188, CESifo Group Munich.
    9. Robin Boadway & Katherine Cuff, 2016. "Optimal Unemployment Insurance and Redistribution," Working Papers 1375, Queen's University, Department of Economics.
    10. Johannes F. Schmieder & Till von Wachter, 2016. "The Effects of Unemployment Insurance Benefits: New Evidence and Interpretation," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 547-581, October.
    11. repec:eee:pubeco:v:153:y:2017:i:c:p:56-68 is not listed on IDEAS

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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