Tagging and Taxing: The Optimal Use of Categorical and Income Information in Designing Tax/Transfer Schemes

14 Pages Posted: 13 Oct 2003  

Rivta Immonen

University of Jyvaskyla

Ravi Kanbur

Cornell University; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Michael Keen

International Monetary Fund (IMF) - Fiscal Affairs Department; CESifo (Center for Economic Studies and Ifo Institute); Institute for Fiscal Studies (IFS)

Matti Tuomala

University of Tampere

Abstract

This paper explores aspects of the optimal design of tax/transfer schemes that involve elements of both 'tagging' (the use of categorical benefits) and 'means-testing' (income-relation of benefits). Simulations suggest a striking qualitative dissimilarity between the group-specific schedules optimally imposed on poorer and richer groups: broadly speaking, the optimal marginal tax rate is decreasing in income among the latter but increasing among the former. This latter observation, potentially important for policy, runs counter to the conventional wisdom from previous simulations. The reconciliation, we argue, lies in the role played in optimal tax design by the revenue constraint.

Suggested Citation

Immonen, Rivta and Kanbur, Ravi and Keen, Michael and Tuomala, Matti, Tagging and Taxing: The Optimal Use of Categorical and Income Information in Designing Tax/Transfer Schemes. Economica, Vol. 65, pp. 179-192, May 1998. Available at SSRN: https://ssrn.com/abstract=440021

Rivta Immonen

University of Jyvaskyla

Seminaarinkatu 30
Jyväskylä, 40100
Finland
+ 358 41 601 054 (Phone)
+ 358 41 601 021 (Fax)

Ravi Kanbur (Contact Author)

Cornell University ( email )

301-J Warren Hall
Ithaca, NY 14853
United States
607-255-7966 (Phone)
607-255-9984 (Fax)

HOME PAGE: http://www.kanbur.dyson.cornell.edu

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

IZA Institute of Labor Economics

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

Michael Keen

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Institute for Fiscal Studies (IFS)

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Matti Tuomala

University of Tampere ( email )

P.O. Box 607
Tampere, FIN-33101
Finland
+358-3-2156031 (Phone)
+358-3-2157254 (Fax)

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