IDEAS home Printed from https://ideas.repec.org/p/qed/wpaper/1073.html
   My bibliography  Save this paper

Optimal Marginal and Average Income Taxation under Maxi-min

Author

Listed:
  • Robin Boadway

    () (Queen's University)

  • Laurence Jacquet

    () (Universite Catholique de Louvain)

Abstract

Using the Mirrlees optimal income tax model with a maxi-min social welfare function, we derive conditions for a decreasing marginal tax rate throughout the skill distribution, a strictly concave tax function in income and a single-peaked average tax schedule. With additive preferences and a constant labor supply elasticity, marginal tax rates are decreasing below the modal skill level, and will also decrease above the mode if aggregate skills are non-decreasing with the skill level. In this case and with a bounded skill distribution or with a constant hazard rate, the tax function is strictly concave in income and the average tax rate single-peaked. When quasilinear utility functions apply in either consumption or leisure, under fairly mild restrictions on the truncated or untruncated distribution function, marginal tax rates are decreasing in skill and the average tax profile is single-peaked. The distribution of skills has the same qualitative influence for either case of quasilinearity. These results continue to hold when there is bunching at the bottom due to a binding non-negativity constraint. We also illustrate how relaxing the assumption of constant elasticity of labor supply, generally used in the literature, modifies the results.

Suggested Citation

  • Robin Boadway & Laurence Jacquet, 2006. "Optimal Marginal and Average Income Taxation under Maxi-min," Working Papers 1073, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1073
    as

    Download full text from publisher

    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1073.pdf
    File Function: First version 2006
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michel Strawczynski & Momi Dahan, 2000. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates: Comment," American Economic Review, American Economic Association, vol. 90(3), pages 681-686, June.
    2. Boadway, Robin & Cuff, Katherine & Marchand, Maurice, 2000. " Optimal Income Taxation with Quasi-linear Preferences Revisited," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(4), pages 435-460.
    3. 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.
    4. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
    5. Antoine d'Autume, 2001. "L'imposition optimale du revenu : une application au cas français," Revue Française d'Économie, Programme National Persée, vol. 15(3), pages 3-63.
    6. Jan Boone & Lans Bovenberg, 2007. "The Simple Economics of Bunching: Optimal Taxation with Quasi-Linear Preferences," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(1), pages 89-105, February.
    7. 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.
    8. Daniel R. Feenberg & James M. Poterba, 1993. "Income Inequality and the Incomes of Very High-Income Taxpayers: Evidence from Tax Returns," NBER Chapters,in: Tax Policy and the Economy, Volume 7, pages 145-177 National Bureau of Economic Research, Inc.
    9. Weymark, John A, 1987. "Comparative Static Properties of Optimal Nonlinear Income Taxes," Econometrica, Econometric Society, vol. 55(5), pages 1165-1185, September.
    10. Guy Laroque, 2005. "Income Maintenance and Labor Force Participation," Econometrica, Econometric Society, vol. 73(2), pages 341-376, March.
    11. repec:ebl:ecbull:v:8:y:2006:i:2:p:1-6 is not listed on IDEAS
    12. Atkinson, A. B., 1990. "Public economics and the economic public," European Economic Review, Elsevier, vol. 34(2-3), pages 225-248, May.
    13. Chone, Philippe & Laroque, Guy, 2005. "Optimal incentives for labor force participation," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 395-425, February.
    14. Revesz, John T, 1989. "The Optimal Taxation of Labour Income," Public Finance = Finances publiques, , vol. 44(3), pages 453-475.
    15. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
    16. Thomas Piketty, 1997. "La redistribution fiscale face au chômage," Revue Française d'Économie, Programme National Persée, vol. 12(1), pages 157-201.
    17. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, March.
    18. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059.
    19. Efraim Sadka, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 261-267.
    20. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
    21. Lollivier, Stefan & Rochet, Jean-Charles, 1983. "Bunching and second-order conditions: A note on optimal tax theory," Journal of Economic Theory, Elsevier, vol. 31(2), pages 392-400, December.
    22. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, vol. 49(1), pages 47-73, October.
    23. Kanbur, Ravi & Tuomala, Matti, 1994. " Inherent Inequality and the Optimal Graduation of Marginal Tax Rates," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(2), pages 275-282.
    24. Alexis PARMENTIER & Etienne LEHMANN & Jean HINDRIKS, 2006. "Optimal income taxation and the shape of average tax rates," Economics Bulletin, AccessEcon, vol. 8(2), pages 1-6.
    25. Parkash Chander & Louis L. Wilde, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Oxford University Press, vol. 65(1), pages 165-183.
    26. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
    27. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 205-229.
    28. Edmund S. Phelps, 1973. "Taxation of Wage Income for Economic Justice," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 331-354.
    29. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July.
    30. Momi Dahan & Michel Strawczynski, 2012. "The Optimal Asymptotic Income Tax Rate," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 14(5), pages 737-755, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Maxi-min; optimal income taxation;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qed:wpaper:1073. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Babcock) or (Rebekah McClure). General contact details of provider: http://edirc.repec.org/data/qedquca.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.