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Optimal redistributive taxation with both extensive and intensive responses

Jacquet, Laurence; Lehmann, Etienne; Van der Linden, Bruno
Working paper
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URI
http://hdl.handle.net/11250/163206
Date
2010-02
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  • Discussion papers (SAM) [578]
Abstract
This paper characterizes the optimal income taxation when individuals respond along

both the intensive and extensive margins. Individuals are heterogeneous in two dimensions:

their skills and their disutility of participation. Preferences over consumption and work effort

can differ with the skill level, only the Spence-Mirrlees condition being imposed. We derive

an optimal tax formula thanks to a tax perturbation approach. This formula generalizes

previous results by allowing for income effects and extensive margin responses. We provide

a sufficient condition for optimal marginal tax rates to be nonnegative everywhere. The

relevance of this condition is discussed with analytical examples and numerical simulations

on U.S. data.
Publisher
Norwegian School of Economics and Business Administration. Department of Economics
Series
Discussion paper
2010:7

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