Optimal Income Taxation with Uncertain Earnings: A Synthesis

31 Pages Posted: 6 Dec 2011

See all articles by Robin Boadway

Robin Boadway

Queen's University; CESifo (Center for Economic Studies and Ifo Institute); Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE)

Motohiro Sato

Hitotsubashi University - Faculty of Economics

Date Written: November 30, 2011

Abstract

We study optimal nonlinear income taxation when earnings can differ because of both ability and luck, so the income tax has both a redistributive role and an insurance role. A substantial literature on optimal redistribution in the absence of uncertainty has evolved since Mirrlees’ original contribution. The literature on the income tax as a social insurance device is more limited. It has largely assumed that households are ex ante identical so unequal earnings are due to uncertainty alone. We provide a general treatment of the optimal income tax under uncertainty when households differ in ability. We characterize optimal marginal tax rates and interpret them in terms of redistribution, insurance and incentive effects. The case of ex ante identical households and the no-risk case with heterogeneous abilities come out as special cases.

Keywords: optimal income taxation, wage risk

JEL Classification: H210, H240

Suggested Citation

Boadway, Robin and Sato, Motohiro, Optimal Income Taxation with Uncertain Earnings: A Synthesis (November 30, 2011). CESifo Working Paper Series No. 3654, Available at SSRN: https://ssrn.com/abstract=1968851

Robin Boadway (Contact Author)

Queen's University ( email )

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Canada
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HOME PAGE: http://qed.econ.queensu.ca/pub/faculty/boadway/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE)

Ste-Foy, Quebec G1K 7P4
Canada

Motohiro Sato

Hitotsubashi University - Faculty of Economics ( email )

Tokyo, 186-8601
Japan

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