Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium

104 Pages Posted: 20 Sep 2016

See all articles by Dominik Sachs

Dominik Sachs

European University Institute; Centre for Economic Policy Research (CEPR)

Aleh Tsyvinski

Yale University - Cowles Foundation; Yale University

Nicolas Werquin

University of Toulouse 1 - Toulouse School of Economics (TSE)

Multiple version iconThere are 4 versions of this paper

Date Written: September 2016

Abstract

We study the incidence and the optimal design of nonlinear income taxes in a Mirrleesian economy with a continuum of endogenous wages. We characterize analytically the incidence of any tax reform by showing that one can mathematically formalize this problem as an integral equation. For a CES production function, we show theoretically and numerically that the general equilibrium forces raise the revenue gains from increasing the progressivity of the U.S. tax schedule. This result is reinforced in the case of a Translog technology where closer skill types are stronger substitutes. We then characterize the optimum tax schedule, and derive a simple closed-form expression for the top tax rate. The U-shape of optimal marginal tax rates is more pronounced than in partial equilibrium. The joint analysis of tax incidence and optimal taxation reveals that the economic insights obtained for the optimum may be reversed when considering reforms of a suboptimal tax code.

Keywords: General Equilibrium, optimal taxation, Tax Incidence, Tax Reforms

JEL Classification: H21, H22

Suggested Citation

Sachs, Dominik and Tsyvinski, Aleh and Tsyvinski, Aleh and Werquin, Nicolas, Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium (September 2016). CEPR Discussion Paper No. DP11497, Available at SSRN: https://ssrn.com/abstract=2840694

Dominik Sachs (Contact Author)

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Aleh Tsyvinski

Yale University - Cowles Foundation ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-9163 (Phone)

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

Nicolas Werquin

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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