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Optimality conditions and comparative static properties of non-linear income taxes revisited

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  • Laurent Simula

    (PJSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, GREMAQ - Groupe de recherche en économie mathématique et quantitative - UT1 - Université Toulouse 1 Capitole - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique, IDEP - Institut d'économie publique - IDEP)

Abstract

Optimality conditions and comparative static properties of the optimal Mirrleesian nonlinear income tax are obtained for a finite population and quasilinear-in-consumption preferences. Contrary to Weymark (1987) who considers quasilinear-in-leisure preferences, the linearity with respect to gross income, which is observed by the government and used as a tax base, is lost. A reduced-form optimal income tax problem is derived, in which consumption levels are obtained as functions of gross incomes. The contribution of this new reduced form is twofold. First, the optimal allocation can be characterized geometrically in a simple way. Second, comparative static results with respect to individual productivities are easy to obtain.

Suggested Citation

  • Laurent Simula, 2007. "Optimality conditions and comparative static properties of non-linear income taxes revisited," PSE Working Papers halshs-00588074, HAL.
  • Handle: RePEc:hal:psewpa:halshs-00588074 Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00588074
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    References listed on IDEAS

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    1. Letendre, Marc-Andre & Smith, Gregor W., 2001. "Precautionary saving and portfolio allocation: DP by GMM," Journal of Monetary Economics, Elsevier, pages 197-215.
    2. Allen Head & Todd Mattina & Gregor Smith, 2004. "Real exchange rates, preferences, and incomplete markets: evidence, 1961-2001," Canadian Journal of Economics, Canadian Economics Association, pages 782-801.
    3. Ignacio Palacios-Huerta, 2003. "An Empirical Analysis of the Risk Properties of Human Capital Returns," American Economic Review, American Economic Association, pages 948-964.
    4. Palacios-Huerta, Ignacio, 2001. "The human capital of stockholders and the international diversification puzzle," Journal of International Economics, Elsevier, vol. 54(2), pages 309-331, August.
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    Cited by:

    1. Alan Krause, 2008. "Optimal Nonlinear Income Taxation with Learning-by-Doing," Discussion Papers 08/08, Department of Economics, University of York.
    2. Brett, Craig & Weymark, John A., 2008. "The impact of changing skill levels on optimal nonlinear income taxes," Journal of Public Economics, Elsevier, pages 1765-1771.
    3. Craig Brett, 2012. "The effects of population aging on optimal redistributive taxes in an overlapping generations model," International Tax and Public Finance, Springer;International Institute of Public Finance, pages 777-799.
    4. Craig Brett & John A. Weymark, 2005. "Optimal Nonlinear Taxation of Income and Savings in a Two Class Economy," Vanderbilt University Department of Economics Working Papers 0525, Vanderbilt University Department of Economics.
    5. Craig Brett & John Weymark, 2008. "Optimal Nonlinear Taxation of Income and Savings without Commitment," Vanderbilt University Department of Economics Working Papers 0805, Vanderbilt University Department of Economics.
    6. Brett, Craig & Weymark, John A., 2008. "The impact of changing skill levels on optimal nonlinear income taxes," Journal of Public Economics, Elsevier, pages 1765-1771.
    7. Leung, Tin Cheuk & Yazici, Hakki, 2011. "On the Optimal Skill Distribution in a Mirrleesian Economy," MPRA Paper 32596, University Library of Munich, Germany.
    8. Krause, Alan, 2009. "Optimal nonlinear income taxation with learning-by-doing," Journal of Public Economics, Elsevier, pages 1098-1110.

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    Keywords

    optimal tax; income tax; comparative statics;

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