Optimal Taxation with Multiple Dimensions of Heterogeneity
This paper develops a general theory of optimal income taxation with multiple dimensions of agent heterogeneity. The main technical hurdle in developing this theory is the possibility that individuals have multiple optimal incomes. Using a perturba...
| Main Authors: | , |
|---|---|
| Language: | English |
| Published: |
World Bank, Washington, DC
2021
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/812041615228703353/Optimal-Taxation-with-Multiple-Dimensions-of-Heterogeneity http://hdl.handle.net/10986/35250 |
| Summary: | This paper develops a general theory of
optimal income taxation with multiple dimensions of agent
heterogeneity. The main technical hurdle in developing this
theory is the possibility that individuals have multiple
optimal incomes. Using a perturbation approach, optimal tax
formulas are derived that account for the possibility that
individuals have multiple optima and, hence, account for the
possibility that individuals jump between their optimal
income levels when the tax schedule is perturbed. The
magnitude of these effects is quantified, thereby augmenting
the optimal tax formulas from Saez (2001) with additional
“jumping effect” terms. The paper provides a partial
characterization of when individuals with multiple optimal
incomes may exist under the optimal tax schedule. Finally,
the paper derives a new methodology to simulate optimal
income tax schedules with multidimensional heterogeneity.
This method is implemented numerically, showing that
individuals with multiple optimal income levels can exist
under the optimal tax schedule. |
|---|