When is a Positive Income Tax Optimal?

21 Pages Posted: 27 Apr 2000 Last revised: 3 Jan 2002

See all articles by Fischer Black

Fischer Black

Sloan School of Management, MIT (Deceased)

Date Written: February 1981

Abstract

When will the optimal mix of a constant income tax with a constant consumption tax involve a positive income tax? The assumptions of the model in which this question is asked include (1) identical individuals with coincident lifetimes who work in every period; (2) initial endowments of physical capital; (3) fixed government expenditures; and (4) government borrowing (or lending) that goes to zero when the world ends. In a model like this, we can ignore the transition problem. If we allow the constant tax on income from capital and the constant tax on wage income to be at different rates, we can ask a further question. When will the optimal mix of all three taxes (including the consumption tax) involve a positive tax on either income from capital or wage income?

Suggested Citation

Black, Fischer, When is a Positive Income Tax Optimal? (February 1981). NBER Working Paper No. w0631. Available at SSRN: https://ssrn.com/abstract=227139

Fischer Black (Contact Author)

Sloan School of Management, MIT (Deceased)

N/A

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