As Easy as ABC? Multidimensional Screening in Public Finance

51 Pages Posted: 16 Feb 2017  

Sander Renes

Erasmus School of Economics; University of Mannheim - SFB 884 Political Economy of Reforms

Floris T. Zoutman

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: January 3, 2017

Abstract

We characterize the second-best allocation in a Mirrleesian optimal tax model where agents differ in multiple dimensions and the planner can tax multiple goods non-linearly. We develop a new method that allows us to solve the partial differential equations that describe the optimum regardless of the dimensionality of the problem. We derive four theoretical properties of the optimum. First, the optimal tax system is described by a multidimensional version of Diamond’s (1998) and Saez’ (2001) ABC-formula. Second, the Atkinson-Stiglitz theorem does not generalize to settings where the planner screens in multiple dimensions. Third, the optimal marginal tax rate on each good depends on the consumption level of multiple goods. Fourth, a no-distortion at the top/bottom result continues to hold. A calibrated simulation on taxation of couples shows a strong positive relationship between an individual’s optimal marginal tax rate and the income earned by his spouse.

Keywords: Optimal Non-Linear Taxation, Redistribution, Tax System, Multi-Dimensional Screening

JEL Classification: C630, D820, H210, H240

Suggested Citation

Renes, Sander and Zoutman, Floris T., As Easy as ABC? Multidimensional Screening in Public Finance (January 3, 2017). CESifo Working Paper Series No. 6301. Available at SSRN: https://ssrn.com/abstract=2918716

Sander Renes (Contact Author)

Erasmus School of Economics ( email )

Netherlands

University of Mannheim - SFB 884 Political Economy of Reforms ( email )

L13, 17
Mannheim, 68131
Germany

HOME PAGE: http://www.sanderrenes.com

Floris T. Zoutman

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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