Optimal Redistributive Taxation with Both Extensive and Intensive Responses

34 Pages Posted: 4 Mar 2010

See all articles by Laurence Jacquet

Laurence Jacquet

Catholic University of Louvain - Economic & Social Research Institute (IRES)

Etienne Lehmann

CREST; Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES); IZA Institute of Labor Economics

Bruno Van der Linden

Université Catholique de Louvain - Institut de Recherches Economiques et Sociales; IZA Institute of Labor Economics

Multiple version iconThere are 3 versions of this paper

Date Written: January 28, 2010

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

JEL Classification: H21, H23

Suggested Citation

Jacquet, Laurence and Lehmann, Etienne and Van der Linden, Bruno, Optimal Redistributive Taxation with Both Extensive and Intensive Responses (January 28, 2010). NHH Dept. of Economics Discussion Paper No. 7/2010. Available at SSRN: https://ssrn.com/abstract=1564151 or http://dx.doi.org/10.2139/ssrn.1564151

Laurence Jacquet (Contact Author)

Catholic University of Louvain - Economic & Social Research Institute (IRES) ( email )

B-1348 Louvain-la-Neuve
Belgium

Etienne Lehmann

CREST ( email )

France

Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES) ( email )

3, Place Montesquieu
1348 Louvain-la-Neuve
Belgium

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Bruno Van der Linden

Université Catholique de Louvain - Institut de Recherches Economiques et Sociales ( email )

3, Place Montesquieu
Louvain-la-Neuve, 1348
Belgium

HOME PAGE: http://perso.uclouvain.be/bruno.vanderlinden/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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