Discussion Paper Series in Economics, Department of Economics, Norwegian School of Economics (NHH)
Optimal Redistributive Taxation with both Extensive and Intensive Responses.
(), Etienne Lehmann
() and Bruno Van der Linden
Abstract: This paper characterizes the optimal income taxation when
individuals respond along both the intensive and extensive margins.
Individuals are heterogeneous in two dimensions: their skills and their
disutility of participation. Preferences over consumption and work effort
can differ with the skill level, only the Spence-Mirrlees condition being
imposed. We derive an optimal tax formula thanks to a tax perturbation
approach. This formula generalizes previous results by allowing for income
effects and extensive margin responses. We provide a sufficient condition
for optimal marginal tax rates to be nonnegative everywhere. The relevance
of this condition is discussed with analytical examples and numerical
simulations on U.S. data.
Keywords: Optimal Tax formula; Tax perturbation; Random participation.; (follow links to similar papers)
JEL-Codes: H21; H23; (follow links to similar papers)
32 pages, January 28, 2010
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