The Optimal Elasticity of Taxable Income
26 Pages Posted: 26 Sep 2000 Last revised: 19 Oct 2010
Date Written: September 2000
The strength of the behavioral response to a tax rate change depends on the environment individuals operate in, and may be manipulated by instruments controlled by the government. We first derive a measure of the social benefit to affecting this elasticity. The paper then examines this effect in the solution to the optimal income taxation problem when such an instrument is available, first in a general model and then in an example when the government chooses the income tax base.
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