IDEAS home Printed from
   My bibliography  Save this paper

Using a microeconometric model of household labour supply to design opimal income taxes



The purpose of this paper is to present an exercise where we identify optimal income tax rules according to various social welfare criteria, keeping fixed the total net tax revenue. Empirical applications of optimal taxation theory have typically adopted analytical expressions for the optimal taxes and then imputed numerical values to their parameters by using “calibration” procedures or previous econometric estimates. Besides the restrictiveness of the assumptions needed to obtain analytical solutions to the optimal taxation problem, a shortcoming of that procedure is the possible inconsistency between the theoretical assumptions and the assumptions implicit in the empirical evidence. In this paper we follow a different procedure, based on a computational approach to the optimal taxation problem. To this end, we estimate a microeconomic model with 78 parameters that capture heterogeneity in consumption-leisure preferences for singles and couples as well as in job opportunities across individuals based on detailed Norwegian household data for 1994. For any given tax rule, the estimated model can be used to simulate the labour supply choices made by single individuals and couples. Those choices are therefore generated by preferences and opportunities that vary across the decision units. We then identify optimal tax rules – within a class of 9-parameter piece-wise linear rules - by iteratively running the model until a given social welfare function attains its maximum under the constraint of keeping constant the total net tax revenue. The parameters to be determined are an exemption level, four marginal tax rates, three “kink points” and a lump sum transfer that can be positive (benefit) or negative (tax). We explore a variety of social welfare functions with differing degree of inequality aversion. All the social welfare functions imply monotonically increasing marginal tax rates. When compared with the current (1994) tax systems, the optimal rules imply a lower average tax rate. Moreover, all the optimal rules imply – with respect to the current rule – lower marginal rates on low and/or average income levels and higher marginal rates on relatively high income levels. These results are partially at odds with the tax reforms that took place in many countries during the last decades. While those reforms embodied the idea of lowering average tax rates, the way to implement it has typically consisted in reducing the top marginal rates. Our results instead suggest to lower average tax rates by reducing marginal rates on low and average income levels and increasing marginal rates on very high income levels.

Suggested Citation

  • Aaberge Rolf & Colombino Ugo, 2010. "Using a microeconometric model of household labour supply to design opimal income taxes," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201016, University of Turin.
  • Handle: RePEc:uto:dipeco:201016

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Porath Elchanan Ben & Gilboa Itzhak, 1994. "Linear Measures, the Gini Index, and The Income-Equality Trade-off," Journal of Economic Theory, Elsevier, vol. 64(2), pages 443-467, December.
    2. Colombino, Ugo & Locatelli, Marilena & Narazani, Edlira & O'Donoghue, Cathal & Shima, Isilda, 2008. "Behavioural and welfare effects of basic income policies: a simulation for European countries," EUROMOD Working Papers EM5/08, EUROMOD at the Institute for Social and Economic Research.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Doerrenberg, Philipp & Duncan, Denvil, 2014. "Experimental evidence on the relationship between tax evasion opportunities and labor supply," European Economic Review, Elsevier, vol. 68(C), pages 48-70.
    2. Morini, Matteo & Pellegrino, Simone, 2018. "Personal income tax reforms: A genetic algorithm approach," European Journal of Operational Research, Elsevier, vol. 264(3), pages 994-1004.
    3. Vandyck, Toon & Van Regemorter, Denise, 2014. "Distributional and regional economic impact of energy taxes in Belgium," Energy Policy, Elsevier, vol. 72(C), pages 190-203.
    4. Dolls, Mathias & Peichl, Andreas & Zimmermann, Klaus F., 2011. "Eine Herausforderung für die G20: Global vereinbarte Schuldenbremsen und transnationale fiskalpolitische Aufsichtsgremien," IZA Standpunkte 45, Institute for the Study of Labor (IZA).
    5. Tanndal, Julia & Waldenström, Daniel, 2016. "Does Financial Deregulation Boost Top Incomes? Evidence from the Big Bang," IZA Discussion Papers 9684, Institute for the Study of Labor (IZA).

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    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:uto:dipeco:201016. 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: (Piero Cavaleri) or (Marina Grazioli). General contact details of provider: .

    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.