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Department of Economics, Stockholm University Research Papers in Economics, Department of Economics, Stockholm University

No 1999:8:
Comments on Social Insurance and the Optimum Piecewise Linear Income Tax

Michael Lundholm ()

Abstract: Using Varianīs social insurance framework with a piecewise linear two bracket income tax, where t_1 is the tax rate in the lower bracket and t_1+t_2 is the tax rate in the upper bracket, Strawcynski (1998) claims that optimal requires t_1^*<t_2^*=1. This note provides three comments: First, it shown that the argument thatt_2^*=1 does not necessarily hold. Second, an equally reasonable interpretation of the result is that t_2^*=0, if an explicit lump sum tax contingent on luck is allowed. Third, the result also depends crucially on that income differences are solely determined by luck, even if the population is ex ante homogenous. In an example is it shown that then t_2^*=0 is optimal.

Keywords: Optimal taxation; social insurance; piecewise linear taxes; (follow links to similar papers)

JEL-Codes: H21; (follow links to similar papers)

6 pages, September 13, 1999

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