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Optimal Redistributive Taxation with both Extensive and Intensive Responses

  • Jacquet, Laurence

    ()

    (Dept. of Economics, Norwegian School of Economics and Business Administration)

  • Lehmann, Etienne

    ()

    (CREST-INSEE)

  • Van der Linden, Bruno

    ()

    (IRES)

This paper characterizes the optimal income taxation when individuals respond along both the intensive and extensive margins. Individuals are heterogeneous in two dimensions: their skills and their disutility of participation. Preferences over consumption and work effort can differ with the skill level, only the Spence-Mirrlees condition being imposed. We derive an optimal tax formula thanks to a tax perturbation approach. This formula generalizes previous results by allowing for income effects and extensive margin responses. We provide a sufficient condition for optimal marginal tax rates to be nonnegative everywhere. The relevance of this condition is discussed with analytical examples and numerical simulations on U.S. data.

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Paper provided by Department of Economics, Norwegian School of Economics in its series Discussion Paper Series in Economics with number 7/2010.

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Length: 32 pages
Date of creation: 28 Jan 2010
Handle: RePEc:hhs:nhheco:2010_007
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