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The Choice of the Personal Income Tax Base

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  • Roger H. Gordon
  • Wojciech Kopczuk

Abstract

Starting with Vickrey (1945) and Mirrlees (1971), the optimal tax literature has studied the design of a personal income tax. The assumed ideal would be to tax earnings ability. Earnings ability is unobservable for tax purposes, however. Past papers have focused instead on designing a tax on labor income. Existing tax bases, though, depend on a broader range of information about each individual than just labor income. In principle, this supplementary information can help in designing a tax that has more attractive distributional properties, by more closely approximating an ability tax. The objective of this paper is to lay out theoretically and estimate empirically how to make best use of available information about each individual in addition to earnings, in a setting where the first-best tax would be an ability tax. The theory lays out an equity/efficiency trade off when choosing the tax base. In the empirical work, we find the tax base that is best on equity grounds alone. We find that the choice to tax couples based on their joint income, and the inclusion of dividends, interest income, and a dependents' deduction in the tax base in roughly their current form can be rationalized simply based on their value in better approximating an ability tax, without any need for supplementary motivations for these provisions. However, the inclusion of mortgage and property tax payments in the list of itemized deductions cannot be defended on these grounds.

Suggested Citation

  • Roger H. Gordon & Wojciech Kopczuk, 2014. "The Choice of the Personal Income Tax Base," NBER Working Papers 20227, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20227 Note: PE
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    References listed on IDEAS

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    1. repec:kap:jeczfn:v:122:y:2017:i:2:d:10.1007_s00712-017-0536-6 is not listed on IDEAS
    2. Jacobs, Bas & Schindler, Dirk, 2012. "On the desirability of taxing capital income in optimal social insurance," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 853-868.
    3. Wojciech Kopczuk, 2012. "Taxation of Intergenerational Transfers and Wealth," NBER Working Papers 18584, National Bureau of Economic Research, Inc.
    4. Jonathan Gruber & Amalie Jensen & Henrik Kleven, 2017. "Do People Respond to the Mortage Interest Deduction? Quasi-Experimental Evidence from Denmark," NBER Working Papers 23600, National Bureau of Economic Research, Inc.
    5. Neisser, Carina, 2017. "The elasticity of taxable income: A meta-regression analysis," ZEW Discussion Papers 17-032, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. Richard Blundell & Andrew Shephard, 2012. "Employment, Hours of Work and the Optimal Taxation of Low-Income Families," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 481-510.
    7. Bas Jacobs, 2013. "From Optimal Tax Theory to Applied Tax Policy," CESifo Working Paper Series 4151, CESifo Group Munich.
    8. Golosov, Mikhail & Troshkin, Maxim & Tsyvinski, Aleh & Weinzierl, Matthew, 2013. "Preference heterogeneity and optimal capital income taxation," Journal of Public Economics, Elsevier, vol. 97(C), pages 160-175.
    9. Jukka Pirttilä & Ilpo Suoniemi, 2014. "Public Provision, Commodity Demand, and Hours of Work: An Empirical Analysis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(4), pages 1044-1067, October.
    10. Jacobs, Bas & Boadway, Robin, 2014. "Optimal linear commodity taxation under optimal non-linear income taxation," Journal of Public Economics, Elsevier, vol. 117(C), pages 201-210.
    11. Peter Diamond & Johannes Spinnewijn, 2011. "Capital Income Taxes with Heterogeneous Discount Rates," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 52-76, November.

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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