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Negative marginal tax rates and heterogeneity

Author

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  • Phillippe Choné

    (Institute for Fiscal Studies)

  • Guy Laroque

    () (Institute for Fiscal Studies)

Abstract

Heterogeneity is likely to be an important determinant of the shape of optimal tax schemes. This article addresses the issue in a model à la Mirrlees with a continuum of agents. The agents differ in their productivities and opportunity costs of work, but their labor supplies depend only on a unidimensional combination of their two characteristics. Conditions are given under which the standard result that marginal tax rates are everywhere non-negative holds. This is in particular the case when work opportunity costs are distributed independently of productivities. But one can also get negative marginal tax rates: economies where negative tax rates are optimal at the bottom of the income distribution are studied, and a numerical illustration is given, based on UK data.

Suggested Citation

  • Phillippe Choné & Guy Laroque, 2009. "Negative marginal tax rates and heterogeneity," IFS Working Papers W09/12, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:09/12
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    References listed on IDEAS

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    1. Hellwig, Martin F., 2007. "A contribution to the theory of optimal utilitarian income taxation," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1449-1477, August.
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    4. Aaron S. Edlin & Chris Shannon, 1998. "Strict Single Crossing and the Strict Spence-Mirrlees Condition: A Comment on Monotone Comparative Statics," Econometrica, Econometric Society, vol. 66(6), pages 1417-1426, November.
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    More about this item

    Keywords

    Optimal taxation; heterogeneity; welfare.;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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