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A Variational Approach to the Analysis of Tax Systems

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  • Mikhail Golosov
  • Aleh Tsyvinski
  • Nicolas Werquin

Abstract

We develop a general method to study the effects of non-linear taxation in dynamic settings using variational arguments. We first derive general theoretical formulas that characterize the welfare effects of local tax reforms and, in particular, the optimal tax system, potentially restricted within certain classes (e.g., age-independent, linear, separable). These formulas are expressed in terms of intuitive parameters, such as the labor and capital income elasticities and the hazard rates of the income distributions. Second, we apply these formulas to various specific settings. In particular, we decompose the gains arising from each element of tax reform, starting from a simple baseline system, as the available tax instruments becomes more sophisticated. We further show that the design of tax systems obeys a common general principle, namely that more sophisticated tax instruments (e.g., age-dependent, non-linear, non-separable) allow the government to fine-tune the tax rates by targeting higher distortions to the segments of the population whose behavior responds relatively little to those taxes.

Suggested Citation

  • Mikhail Golosov & Aleh Tsyvinski & Nicolas Werquin, 2014. "A Variational Approach to the Analysis of Tax Systems," NBER Working Papers 20780, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20780
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    References listed on IDEAS

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    7. Thomas Piketty & Emmanuel Saez & Stefanie Stantcheva, 2014. "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 230-271, February.
    8. Rothschild, Casey & Scheuer, Florian, 2014. "A theory of income taxation under multidimensional skill heterogeneity," LSE Research Online Documents on Economics 58026, London School of Economics and Political Science, LSE Library.
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    16. Mikhail Golosov & Aleh Tsyvinski & Nicolas Werquin, 2014. "A Variational Approach to the Analysis of Tax Systems," NBER Working Papers 20780, National Bureau of Economic Research, Inc.
    17. Maag, Elaine & Steuerle, C. Eugene & Chakravarti, Ritadhi & Quakenbush, Caleb, 2012. "How Marginal Tax Rates Affect Families at Various Levels of Poverty," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(4), pages 759-782, December.
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    Cited by:

    1. Dominik Sachs & Sebastian Findeisen, 2016. "Optimal Financial Aid Policies for Students," 2016 Meeting Papers 1421, Society for Economic Dynamics.
    2. Casey Rothschild & Florian Scheuer, 2014. "A Theory of Income Taxation under Multidimensional Skill Heterogeneity," NBER Working Papers 19822, National Bureau of Economic Research, Inc.
    3. Findeisen, Sebastian & Sachs, Dominik, 2017. "Redistribution and insurance with simple tax instruments," Journal of Public Economics, Elsevier, vol. 146(C), pages 58-78.
    4. Laurence Jacquet & Etienne Lehmann, 2017. "Optimal Income Taxation with Composition Effects," CESifo Working Paper Series 6654, CESifo Group Munich.
    5. Stefanie Stantcheva, 2015. "Optimal Taxation and R&D Policies," 2015 Meeting Papers 1533, Society for Economic Dynamics.
    6. Yongsung Chang & Yena Park, 2017. "Optimal Taxation with Private Insurance," Working papers 2017rwp-105, Yonsei University, Yonsei Economics Research Institute.
    7. Aleh Tsyvinski & Nicolas Werquin, 2017. "Generalized Compensation Principle," NBER Working Papers 23509, National Bureau of Economic Research, Inc.
    8. Findeisen, Sebastian & Sachs, Dominik, 2015. "Designing efficient college and tax policies," Working Papers 15-09, University of Mannheim, Department of Economics.
    9. Mikhail Golosov & Aleh Tsyvinski & Nicolas Werquin, 2014. "A Variational Approach to the Analysis of Tax Systems," NBER Working Papers 20780, National Bureau of Economic Research, Inc.
    10. Eden,Maya, 2017. "Is there enough redistribution ?," Policy Research Working Paper Series 8003, The World Bank.
    11. Ethan Ilzetzki, 2015. "A Positive Theory of Tax Reform," Discussion Papers 1526, Centre for Macroeconomics (CFM).
    12. Felix Bierbrauer & Pierre C. Boyer, 2017. "Politically Feasible Reforms of Non-Linear Tax Systems," CESifo Working Paper Series 6573, CESifo Group Munich.
    13. Dominik Sachs & Aleh Tsyvinski & Nicolas Werquin, 2016. "Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium," NBER Working Papers 22646, National Bureau of Economic Research, Inc.
    14. Stefanie Stantcheva, 2015. "Optimal Income, Education, and Bequest Taxes in an Intergenerational Model," NBER Working Papers 21177, National Bureau of Economic Research, Inc.
    15. Stefanie Stantcheva, 2015. "Learning and (or) Doing: Human Capital Investments and Optimal Taxation," NBER Working Papers 21381, National Bureau of Economic Research, Inc.
    16. Dominik Sachs & Aleh Tsyvinski & Nicolas Werquin, 2016. "A Theory of Asset Prices Based on Heterogeneous Information," Cowles Foundation Discussion Papers 2051, Cowles Foundation for Research in Economics, Yale University.
    17. Aart Gerritsen, 2016. "Optimal Nonlinear Taxation: The Dual Approach," Working Papers tax-mpg-rps-2016-02, Max Planck Institute for Tax Law and Public Finance.
    18. Emmanuel Saez & Stefanie Stantcheva, 2016. "A Simpler Theory of Optimal Capital Taxation," NBER Working Papers 22664, National Bureau of Economic Research, Inc.
    19. Sachs, Dominik & Findeisen, Sebastian, 2015. "Insurance and Redistribution with Simple Tax Instruments," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113099, Verein für Socialpolitik / German Economic Association.
    20. Felix Bierbrauer & Aleh Tsyvinski & Nicolas D. Werquin, 2017. "Taxes and Turnout," NBER Working Papers 24123, National Bureau of Economic Research, Inc.

    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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