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Locally Optimal Three-Bracket Piecewise Linear Income Taxation

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  • Alan Krause

Abstract

The aim of this paper is to examine the setting of income tax policy from the perspective faced by governments. The government takes the current income tax schedule as the starting point, and seeks to implement a small change in the tax schedule that is both feasible and desirable. If no such change is possible, the current income tax schedule is said to be locally optimal, because it cannot be improved upon via a small reform. We assume that the current income tax schedule is piecewise linear with three tax brackets, which approximates most real-world income tax schedules. The characteristics of locally-optimal piecewise linear income tax schedules are then derived, with particular attention paid to the extent to which they depart from linearity.

Suggested Citation

  • Alan Krause, 2018. "Locally Optimal Three-Bracket Piecewise Linear Income Taxation," Discussion Papers 18/02, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:18/02
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    Keywords

    piecewise linear income taxation; tax reform;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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