Optimal Redistributive Taxation with Both Extensive and Intensive Responses

42 Pages Posted: 20 Jan 2011

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: December 30, 2010

Abstract

We derive a general optimal income tax formula when individuals respond along both the intensive and extensive margins and when income effects can prevail. Individuals are heterogeneous across two dimensions: their skill and their disutility of participation. Preferences over consumption and work effort can differ with respect to the level of skill, with only the Spence-Mirrlees condition being imposed. Employing a new tax perturbation approach that integrates the nonlinearity of the tax function into the behavioral elasticities, we derive a fairly mild condition for optimal marginal tax rates to be nonnegative everywhere. Numerical simulations using U.S. data confirm the mildness of our conditions. The extensive margin strongly reduces the level of optimal marginal tax rates.

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 (December 30, 2010). CESifo Working Paper Series No. 3308. Available at SSRN: https://ssrn.com/abstract=1742790

Laurence Jacquet

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

B-1348 Louvain-la-Neuve
Belgium

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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