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Optimal Nonlinear Income Taxation with Multidimensional Types: The Case with Heterogeneous Behavioral Responses

Author

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  • Laurence JACQUET
  • Etienne LEHMANN

    (Université de Cergy-Pontoise, THEMA
    University Panth´eon Assas and CREST)

Abstract

This paper develops a general method to solve the optimal nonlinear income tax model with one action (individual pre-tax income) and multidimensional characteristics. Individuals differ in terms of skills and belong to different groups. A group is a subset of individuals with the same vector of characteristics but distinct skill levels. Assuming the Spence-Mirrlees single-crossing condition (with respect to the level of skill) in each group,we first derive the optimal second-best allocation. We then show how this optimality condition leads to a tax formula in terms of behavioral responses, social welfare weights and income density in the vein of Saez (2001). However, our multidimensional context implies that all these terms are averaged across individuals who earn the same income. We also show how our method can be used to solve a large set of policy relevant problems for which it is crucial to introduce multidimensional heterogeneity, e.g., joint taxation of households,nonlinear pricing of a monopoly.

Suggested Citation

  • Laurence JACQUET & Etienne LEHMANN, 2014. "Optimal Nonlinear Income Taxation with Multidimensional Types: The Case with Heterogeneous Behavioral Responses," THEMA Working Papers 2014-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    • Handle: RePEc:ema:worpap:2014-01
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    References listed on IDEAS

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    Cited by:

    1. Hunt Allcott & Benjamin B Lockwood & Dmitry Taubinsky, 2019. "Regressive Sin Taxes, with an Application to the Optimal Soda Tax," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(3), pages 1557-1626.
    2. Casey Rothschild & Florian Scheuer, 2014. "A Theory of Income Taxation under Multidimensional Skill Heterogeneity," NBER Working Papers 19822, National Bureau of Economic Research, Inc.
    3. Alain Trannoy, 2019. "Talent, equality of opportunity and optimal non-linear income tax," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 17(1), pages 5-28, March.
    4. Fleurbaey, Marc & Maniquet, François, 2015. "Optimal taxation theory and principles of fairness," LIDAM Discussion Papers CORE 2015005, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Benjamin B. Lockwood & Dmitry Taubinsky, 2017. "Regressive Sin Taxes," NBER Working Papers 23085, National Bureau of Economic Research, Inc.

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