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Optimal Redistributive Taxation with both Extensive and Intensive Responses

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  • Laurence Jacquet

    (Crest)

  • Etienne Lehmann

    (Crest)

  • Bruno Van Der Linden

    (Crest)

Abstract

We derive a general optimal income tax formula when individuals respond along both the intensiveand extensive margins and when income effects can prevail. Individuals are heterogeneous across twodimensions: their skill and their disutility of participation. Preferences over consumption and workeffort can differ with respect to the level of skill, with only the Spence-Mirrlees condition beingimposed. Employing a new tax perturbation approach that integrates the nonlinearity of the taxfunction into the behavioral elasticities, we derive a fairly mild condition for optimal marginal taxrates to be nonnegative everywhere. Numerical simulations using U.S. data confirm the mildness ofour conditions. The extensive margin strongly reduces the level of optimal marginal tax rates

Suggested Citation

  • Laurence Jacquet & Etienne Lehmann & Bruno Van Der Linden, 2010. "Optimal Redistributive Taxation with both Extensive and Intensive Responses," Working Papers 2010-15, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2010-15
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    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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