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Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach

Listed author(s):
  • Kroft, Kory

    ()

    (University of Toronto)

  • Kucko, Kavan

    ()

    (Boston University)

  • Lehmann, Etienne

    ()

    (CRED, Université Panthéon Assas Paris 2)

  • Schmieder, Johannes F.

    ()

    (Boston University)

We derive a sufficient statistics optimal tax formula in a general model that incorporates unemployment and endogenous wages, to study the shape of the tax and transfer system at the bottom of the distribution. The sufficient statistics are the macro employment response to taxation and the micro and macro participation responses. We estimate these statistics using policy variation from the U.S. tax and transfer system. Our results suggest that the optimal tax more closely resembles a Negative Income Tax than an Earned Income Tax Credit relative to the case where unemployment and wage responses are not taken into account.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 9719.

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Length: 51 pages
Date of creation: Feb 2016
Handle: RePEc:iza:izadps:dp9719
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