Optimal Taxation with Multiple Incomes and Types

Tinbergen Institute Discussion Paper 2022-006/VI

56 Pages Posted: 31 Jan 2022

See all articles by Kevin Spiritus

Kevin Spiritus

KU Leuven; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Etienne Lehmann

Université Paris II - Panthéon-Assas - ERMES

Sander Renes

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Floris Zoutman

Norwegian School of Economics (NHH) - Department of Business and Management Science

Multiple version iconThere are 4 versions of this paper

Date Written: January 19, 2022

Abstract

We analyze the optimal nonlinear income tax schedule when taxpayers earn multiple in- comes and differ along many unobserved dimensions. We derive the necessary conditions for the government’s optimum using both a tax perturbation and a mechanism design approach, and show that both methods produce the same results. Our main contribution is to propose a numerical method to find the optimal tax schedule. Applied to the optimal taxation of couples, we find that optimal isotax curves are very close to linear and parallel. The slope of isotax curves is strongly affected by the relative tax-elasticity of male and female income. We make several additional contributions, including a test for Pareto efficiency and a condition on primitives that ensures the government’s necessary conditions are sufficient and the solution to the problem is unique.

Keywords: Nonlinear Optimal Taxation, Multidimensional Screening, Household Income Taxation

JEL Classification: H21, H23, H24, D82

Suggested Citation

Spiritus, Kevin and Spiritus, Kevin and Lehmann, Etienne and Renes, Sander and Zoutman, Floris, Optimal Taxation with Multiple Incomes and Types (January 19, 2022). Tinbergen Institute Discussion Paper 2022-006/VI, Available at SSRN: https://ssrn.com/abstract=4016587 or http://dx.doi.org/10.2139/ssrn.4016587

Kevin Spiritus (Contact Author)

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Etienne Lehmann

Université Paris II - Panthéon-Assas - ERMES ( email )

12 Place du Panthéon
Paris, Cedex 5, 75005
France

Sander Renes

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Floris Zoutman

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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