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Many-Person Ramsey Rule and Nonlinear Income Taxation

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Abstract

We provide a necessary condition for optimal commodity taxes when agents differ according to labor skill and consumption tastes and when the government can also use a general nonlinear tax on labor income. The discouragement index of commodities in shown to be the sum of (1) the distributive factors over the different income classes and (2) the excess demand of mimickers. The first component arises whenever there is taste heterogeneity within income classes. The second one arises whenever there is taste heterogeneity between income classes. In an empirical application from Canadian microdata we delineate groups of households with homogeneous tastes based on nonviolation of revealed preferences. Assuming that indirect taxes are set optimally, we identify the relevant incentive constraints and provide estimates for social values of the different groups. Redistribution from indirect taxes favors households living in rural Quebec

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  • Stéphane Gauthier & Fanny Henriet, 2015. "Many-Person Ramsey Rule and Nonlinear Income Taxation," Documents de travail du Centre d'Economie de la Sorbonne 15033, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  • Handle: RePEc:mse:cesdoc:15033
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    More about this item

    Keywords

    Taste heterogeneity; commodity taxes; income taxation; redistribution; empirical test for asymmetric information; social weights;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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