Using a Microeconometric Model of Household Labour Supply to Design Optimal Income Taxes

27 Pages Posted: 11 Apr 2013

See all articles by Rolf Aaberge

Rolf Aaberge

Statistics Norway; Institute for the Study of Labor (IZA); Deaprtment of Economics

Ugo Colombino

University of Turin - Department of Economics

Date Written: April 2013

Abstract

With regards to empirical applications of optimal taxation theory, analytical expressions are typically adopted for optimal taxes, and then numerical values are imputed to their parameters by calibration or by using previous estimates. We aim to avoid the restrictive assumptions and possible inconsistencies of this approach. In contrast, we identify optimal taxes by iteratively running a microeconometric model, based on 1994 Norwegian data, until a given social welfare function is maximized, given the public budget constraint. The optimal rules envisage monotonically increasing marginal rates (negative on very low incomes) and – compared to the current rule – a lower average rate, lower marginal rates on low incomes, and higher marginal rates on very high incomes.

Keywords: Microsimulation, optimal taxation, random utility model

JEL Classification: H21, H31, J22

Suggested Citation

Aaberge, Rolf and Colombino, Ugo, Using a Microeconometric Model of Household Labour Supply to Design Optimal Income Taxes (April 2013). The Scandinavian Journal of Economics, Vol. 115, Issue 2, pp. 449-475, 2013, Available at SSRN: https://ssrn.com/abstract=2248473 or http://dx.doi.org/10.1111/sjoe.12015

Rolf Aaberge (Contact Author)

Statistics Norway ( email )

N-0033 Oslo
Norway

Institute for the Study of Labor (IZA) ( email )

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

Deaprtment of Economics ( email )

Norway

Ugo Colombino

University of Turin - Department of Economics ( email )

Via Po, 53
Torino, 10124
Italy

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