A Characterization for Marginal Income Tax Schedules

The paper studies the optimal income taxation with a finite number of types. It is shown that Rawlsian social welfare and maximax social welfare functions constitute upper and lower bounds for the second-best optimal marginal tax schedules. Therefore any marginal tax schedule with a higher tax rate than Rawlsian bound or with a lower tax rate than maximax bound would be inefficient. Moreover, it is shown that reasonable marginal tax schedules between these two benchmarks could be supported as a second-best tax schedule with appropriate social weights. These results are also valid when bunching is optimal. Additionally, some characterization for the total tax rates at the top and bottom of the income distribution are given

Externalities and Optimal Taxation: A Progressive Tax Case

The paper studies the optimal income taxation by adding utility interdependence over labour choice. Both theoretically and numerically, it is shown that the optimal marginal tax schedule could be progressive with this additional feature. Previous studies on optimal redistributive income taxation consider the consumption externalities but ignore the labour interdependency. Specifically, if disutility depends on the average working hour, the increase in an agent’s working hour creates positive externality on other agents as it lowers the disutility of others. It is shown that as the degree of utility interdependence increases, the tax schedule becomes more progressive. Moreover, the paper analyses the effect of having a more dispersed skill distribution on the marginal income tax rates. By using their wage distribution data as a proxy for their ability distribution, the optimal marginal tax rates in the United Kingdom and the Czech Republic are examined. Considering the more unequal wage distribution in the UK, there should be a more progressive tax schedule

Optimal income taxation under labor interdependence

In this thesis, I consider optimal redistributive income taxation under a Mirrleesian framework while adding utility interdependence over labor choice and analyze whether the optimal tax schedule is regressive or progressive. In this environment, I show that optimal marginal income taxation could be progressive depending on the parameters of the model. There are two separate forces that are at work in determining the optimal tax schedule. First, due to the informational problems, there is a usual Mirrleesian force that works towards the regressivity of taxes. Second effect is a novel force that arises from labor externality and has a progressive effect on the income tax. This effect could be called as Pigouvian tax. Labor externality requires subsidies for agents which are asymmetric according to productivities. Because of this asymmetry, there should be higher subsidies for low types which has a progressive effect on the optimal tax schedule. Pigouvian and Mirrleesian effects are in a multiplicative form in the tax function, therefore the tax schedule is identified by the effect which is more powerful. I also show that, when we consider the labor interdependence, zero tax at the top of the skill distribution result is no longer valid. Additionally, I show that even under full information the market is not efficient and there is a need for progressive income taxes, as there is a need to correct the labor externality. Moreover, the numerical examples of the paper show the progressive effect of labor externality on the tax schedule. This additional concern about labor externality makes the income taxation schedule more consistent with the current tax policies

A Characterization for Marginal Income Tax Schedules

The paper studies the optimal income taxation with a finite number of types. It is shown that Rawlsian social welfare and maximax social welfare functions constitute upper and lower bounds for the second-best optimal marginal tax schedules. Therefore any marginal tax schedule with a higher tax rate than Rawlsian bound or with a lower tax rate than maximax bound would be inefficient. Moreover, it is shown that reasonable marginal tax schedules between these two benchmarks could be supported as a second-best tax schedule with appropriate social weights. These results are also valid when bunching is optimal. Additionally, some characterization for the total tax rates at the top and bottom of the income distribution are given