Optimality conditions and comparative static properties of non-linear income taxes revisited

Optimality conditions and comparative static properties of the optimal Mirrleesian nonlinear income tax are obtained for a finite population and quasilinear-in-consumption preferences. Contrary to Weymark (1987) who considers quasilinear-in-leisure preferences, the linearity with respect to gross income, which is observed by the government and used as a tax base, is lost. A reduced-form optimal income tax problem is derived, in which consumption levels are obtained as functions of gross incomes. The contribution of this new reduced form is twofold. First, the optimal allocation can be characterized geometrically in a simple way. Second, comparative static results with respect to individual productivities are easy to obtain.optimal tax ; income tax ; comparative statics

Shall we Keep the Highly Skilled at Home? The Optimal Income Tax Perspective

We examine how allowing individuals to emigrate to pay lower taxes abroad changes the optimal non-linear income tax scheme in a Mirrleesian economy. An individual emigrates if his domestic utility is less than his utility abroad net of migration costs, utilities and costs both depending on productivity. Three average social criteria are distinguished – national, citizen and resident – according to the agents whose welfare matters. A curse of the middle-skilled occurs in the first-best, and it may be optimal to let some highly skilled leave the country under the resident criterion. In the second-best, under the Citizen and Resident criteria, preventing emigration of the highly skilled is not necessarily optimal because the interaction between the incentive-compatibility and participations constraints may cause countervailing incentives. In important cases, a Rawlsian policymaker should decrease top marginal tax rates to keep everyone at home.optimal income tax, top-income earners, migration, incentive constraints, participation constraints

Marginal Deadweight Loss when the Income Tax is Nonlinear

Almost all theoretical work on how to calculate the marginal deadweight loss has been done for linear taxes and for variations in linear budget constraints. This is quite surprising since most income tax systems are nonlinear, generating nonlinear budget constraints. Instead of developing the proper procedure to calculate the marginal deadweight loss for variations in nonlinear income taxes a common procedure has been to linearize the nonlinear budget constraint and apply methods that are correct for variations in a linear income tax. Such a procedure leads to incorrect results. The main purpose of this paper is to show how to correctly calculate the marginal deadweight loss when the income tax is nonlinear. A second purpose is to evaluate the bias in results that obtains when the traditional linearization procedure is used. We perform calculations based on the 2006 US tax system and find that the relative deadweight loss caused by increasing existing tax rates is large but less than half of Feldstein’s (1999) estimates for the 1994 tax system.deadweight loss, taxable income, nonlinear budget constraint

Optimality conditions and comparative static properties of non-linear income taxes revisited

Optimality conditions and comparative static properties of the optimal Mirrleesian nonlinear income tax are obtained for a finite population and quasilinear-in-consumption preferences. Contrary to Weymark (1987) who considers quasilinear-in-leisure preferences, the linearity with respect to gross income, which is observed by the government and used as a tax base, is lost. A reduced-form optimal income tax problem is derived, in which consumption levels are obtained as functions of gross incomes. The contribution of this new reduced form is twofold. First, the optimal allocation can be characterized geometrically in a simple way. Second, comparative static results with respect to individual productivities are easy to obtain.Cet article dérive les conditions d'optimalité et les propriétés de statique comparative du modèle d'imposition optimale sur le revenu à la Mirrlees lorsque la population est finie et les préférences individuelles sont quasilinéaires en consommation. Contrairement à Weymark (1987) qui considère des préférences quasilinéaires en loisir, la linéarité par rapport au revenu brut, variable observée par le gouvernement et utilisée comme assiette fiscale, disparaît. Une forme réduite du problème d'imposition optimale est obtenue, dans laquelle les consommations optimales sont fonctions des revenus bruts. La contribution de cette nouvelle forme réduite est de deux ordres. D'une part, l'allocation optimale peut être caractérisée géométriquement d'une fa&ccdelil;on très simple. D'autre part, elle permet d'obtenir aisément des résultats de statique comparative par rapport aux productivités individuelles

The distortive costs of taxation

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the distortive costs of income taxation

co-écrit avec Aart GerritsenInternational audienc