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A Contribution to the Theory of Optimal Utilitarian Income Taxation

  • Martin Hellwig

    ()

    (Max-Planck-Institute for Research on Collective Goods)

The paper provides a new proof of the positivity of the optimal marginal income tax, in a more general model, under weaker assumptions. The analysis focusses on the (weakly) relaxed problem in which upward incentive constraints are replaced by a monotonicity condition on consumption. Without upward incentive constraints, nonnegativity of the optimal marginal income tax is straightforward; strict positivity follows from an assumption on the desirability of redistributing leisure. The resulting allocation is incentive compatible, and is optimal for the original income tax problem. The argument is the same for distributions with finitely many types and for a continuous type distribution.

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File URL: http://www.coll.mpg.de/pdf_dat/2005_23online.pdf
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Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2005_23.

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Length: 51 pages
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:mpg:wpaper:2005_23
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  1. Stefan Homburg, 2001. "The Optimal Income Tax: Restatement and Extensions," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(4), pages 363-395, November.
  2. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  3. Hellwig, Martin F., 1986. "The optimal linear income tax revisited," Journal of Public Economics, Elsevier, vol. 31(2), pages 163-179, November.
  4. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  5. Martin Hellwig, 2005. "The Undesirability of Randomized Income Taxation under Decreasing Risk Aversion," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2005_27, Max Planck Institute for Research on Collective Goods.
  6. Martin Hellwig, 2007. "A Contribution to the Theory of Optimal Utilitarian Income Taxation," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2007_2, Max Planck Institute for Research on Collective Goods.
  7. Guesnerie, Roger & Seade, Jesus, 1982. "Nonlinear pricing in a finite economy," Journal of Public Economics, Elsevier, vol. 17(2), pages 157-179, March.
  8. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, vol. 49(1), pages 47-73, October.
  9. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Christiansen, Vidar, 1983. " Some Important Properties of the Social Marginal Utility of Income," Scandinavian Journal of Economics, Wiley Blackwell, vol. 85(3), pages 359-71.
  11. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
  12. Martin Hellwig, 2008. "A Maximum Principle for Control Problems with Monotonicity Constraints," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2008_04, Max Planck Institute for Research on Collective Goods.
  13. Besley, T. & Coate, S., 1991. "The Design Of Income Maintenance Programs," Papers 74, Princeton, Woodrow Wilson School - John M. Olin Program.
  14. Peter J. Hammond, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Oxford University Press, vol. 46(2), pages 263-282.
  15. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July.
  16. Guy Laroque, 2005. "Income Maintenance and Labor Force Participation," Econometrica, Econometric Society, vol. 73(2), pages 341-376, 03.
  17. Philippe Choné & Guy Laroque, 2006. "Should Low Skilled Work be Subsidized ?," Working Papers 2006-08, Centre de Recherche en Economie et Statistique.
  18. Matthews, Steven & Moore, John, 1987. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Econometrica, Econometric Society, vol. 55(2), pages 441-67, March.
  19. Brunner, Johann K., 1993. "A note on the optimum income tax," Journal of Public Economics, Elsevier, vol. 50(3), pages 445-451, March.
  20. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
  21. Jesus Seade, 1982. "On the Sign of the Optimum Marginal Income Tax," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 637-643.
  22. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1039-1073.
  23. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
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