Randomization in Optimal Income Tax Schedules

51 Pages Posted: 11 Jul 2007 Last revised: 29 Jun 2010

See all articles by Dagobert L. Brito

Dagobert L. Brito

Rice University - Department of Economics

Jonathan H. Hamilton

University of Florida - Warrington College of Business Administration - Department of Economics

Steven Slutsky

University of Florida - Department of Economics

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: March 1990

Abstract

The optimal income tax problem, since it requires self-selection constraints which define nonconvex feasible sets, is one of the many problems in economics for which randomization in the solution may be desirable. For a two-class economy. we characterize the optimal random tax schedules and we present necessary and sufficient conditions for the desirability of local randomization. The standard single-crossing restriction on preferences is not required for these results. We also show that randomization can be beneficial without violating (ex post as well as ex ante) horizontal equity. Lastly, we give an example to demonstrate that the gains from randomization may be large.

Suggested Citation

Brito, Dagobert L. and Hamilton, Jonathan H. and Slutsky, Steven M. and Stiglitz, Joseph E., Randomization in Optimal Income Tax Schedules (March 1990). NBER Working Paper No. w3289. Available at SSRN: https://ssrn.com/abstract=468821

Dagobert L. Brito (Contact Author)

Rice University - Department of Economics ( email )

6100 South Main Street
Houston, TX 77005
United States

Jonathan H. Hamilton

University of Florida - Warrington College of Business Administration - Department of Economics ( email )

Gainesville, FL 32611-7140
United States
352-392-5017 (Phone)
352-392-7860 (Fax)

HOME PAGE: http://people.clas.ufl.edu/hamilton/

Steven M. Slutsky

University of Florida - Department of Economics

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

3022 Broadway
814 Uris Hall
New York, NY 10027
United States
(212) 854-0671 (Phone)
(212) 662-8474 (Fax)

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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