Scandinavian Working Papers in Economics
Working Paper Series, Center for Fiscal Studies,
Uppsala University, Department of Economics
No 2009:11: Optimal Nonlinear Income Tax and Nonlinear Pricing: Optimality Conditions and Comparative Static Properties
Laurent Simula ()
Additional contact information
Laurent Simula: Uppsala Center for Fiscal Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Abstract: Using the Mirrlees optimal income tax model, with no income effects on labour supply, this article shows that the discrete population approach provides new insights into the characterization of the optimal tax system, which complements the previous findings. The analysis is based on the "Spence-Mirrlees wedge" which corresponds, at each observed gross income level, to a ratio between the marginal tax rate of the individual for whom the bundle is designed and that of his nearest more productive neighbour if he chooses to mimic. Using this wedge, a necessary and sufficient condition for bunching to be optimal is obtained in terms of the primitives of the model, separating optima are characterized geometrically, and comparative statics properties derived, notably with respect to skill levels and individual social weights. It is then shown that the analysis extends to adverse-selection problems where participation constraints replace the tax revenue constraint.
Keywords: Optimal Tax; Income Tax; Nonlinear Pricing; Adverse-Selection; Comparative Statics
25 pages, October 12, 2009
Full text files
129498_wp200911.pdf
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