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Pareto Efficient Income Taxation with Stochastic Abilities

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  • Stephen Coate
  • Marco Battaglini

Abstract

This paper studies Pareto e.cient income taxation in an economy with infinitely-lived individuals whose income generating abilities evolve according to a two-state Markov process. The study yields two main results. First, when individuals are risk neutral, the fraction of individuals who face a positive marginal income tax rate is always positive but converges to zero. Moreover, the tax rate these individuals face also goes to zero. Second, Pareto e.cient income tax systems can be time-consistent even when the degree of correlation in ability types is large

Suggested Citation

  • Stephen Coate & Marco Battaglini, 2004. "Pareto Efficient Income Taxation with Stochastic Abilities," 2004 Meeting Papers 140, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:140
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    References listed on IDEAS

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    Keywords

    dynamic taxation;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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