This result was theoretically established by diamond 1998 and confirmed by. Taxpayers position here is that he was entitled to defer income taxation on the compensation for his services except as partnership earnings were realized. We study a simple dynamic moral hazard model of social insurance with observable and nonobservable saving decisions. How changes in the populations ability distribution affect optimal income tax schedules has received little attention. Relate optimal tax formulas to labor supply elasticities. First, we provide historical and international background on labor income taxation and meanstested transfers.
Optimal taxation in theory and practice 060109 final. Optimal income taxation and the ability distribution. Henrik jacobsen kleven london school of economics lecture notes for msc public economics ec426. Optimal dual income taxation patricia apps university of sydney law school and iza ray rees university of munich, university of oslo, university of warwick and cesifo 19 january 2014 abstract there is a strong case for arguing that, in contradiction to some traditional arguments in public economics, capital income should be taxed. An example with a ushaped pattern of optimal marginal tax rates. It follows, therefore, that the largest single tax paid by the average canadian family is the income tax. We emphasize connections between theory and empirical work that were initially lacking from optimal income tax theory. As recently argued by diamond 1998, one of the key factors explaining the progressivity of an optimal nonlinear income tax is the distribution of productivity among workers. Top 1% has large potential tax capacity but increasing top 1% marginal tax rate might reduce top incomes through behavioral responses 3. Moreover, for a class of widely used preferences, consumption taxes are zero in the limit as well. As recently argued by diamond 1998, one of the key factors explaining the progressivity of an optimal nonlinear income tax is the distribution of productivity.
Family size and optimal income taxation springerlink. Optimal commodity taxation and redistribution within households using a collective model of consumption, we characterize optimal commodity taxes aimed at targeting specific individuals within the household. Or should marginal tax rates beincreasingwith income, as in the u. Using the mirrlees optimal income tax model with quasilinear preferences, the paper examines conditions for marginal tax rates to be rising at high income levels and.
We find that optimal labor income taxes become less progressive when the ability to tax savings is limited. Diamonds result dormant for 20 years but then generated a urry of studies saez 02, laroque 05, etc. His paper makes explicit the factors that affect the optimal shape of income tax rates. Most of the papers in the literature restrict the unobserved heterogeneity to be one dimensional, typically skill see e.
This book provides a comprehensive survey of optimal income tax theory, following the development of research strategy from the basic mirrlees model through its refinements that examine how optimal tax rates and the shape of tax schedules are affected by new considerations. Migration is one source of changes in the productivity distribution. Optimal tax theory has an important contribution to make to. Optimal nonlinear income taxation with costly tax avoidance borys grochulski t he central idea behind an important branch of modern public. Optimal top income tax rate saez 01 recall from last lecture. Published in volume 6, issue 1, pages 23071 of american economic journal. Optimal income taxation with multidimensional taxpayer types. Individual income tax rates and tax shares, 1998 8 5 tax years 1993 through 1996 had a fiverate tax bracket structure with a maximum statutory tax rate of 39. Vickrey first thought about optimal income tax problem, but couldnt solve it because choices depend on entire budget set not convex. Diamond using the mirrlees optimal income tax model with quasilinear preferences, the paper examines conditions for marginal tax rates to be rising at high income levels and declining in an interval containing the modal skill. High income optimal tax rates i show in this section that the classic method of the optimal linear income tax literature can be used to derive in a simple way an optimal tax rate formula for high income earners. Mirrlees meets ramsey jonathan heathcote frb minneapolis and cepr. We address this question in an environment featuring distinct roles for public and private insurance. S approaches to studying optimal taxation mirrleesian approach no restrictionson shape of tax transfer schedule.
From theory to practice emmanuel saez april 2010 1. This paper derives optimal top tax rate formulas in a mod. European governments aim to raise labour supply, cut unemployment and, at the same time, maintain social cohesion. Optimal commodity taxation and redistribution within. Chelin suy july 31, 2006z abstract beginning with mirrlees, the optimal taxation literature has generally focused on economies where individuals are di. We consider a second best setting where the government observes the number of children and the income of the parents but not their productivity. These models often give negative participation tax rates at the bottom.
On the optimal taxation of capital income sciencedirect. Income tax evasion and optimal income taxation insook lee may 17, 2014 abstract this paper characterizes an optimal nonlinear income tax that incorporates individualsdecisions regarding tax evasion and labor supply and an optimal rate of tax enforcement when implementing tax code is costly. Diamond 1998 analyzed the case of utilit y functions with no income e ects and noticed that the. On the optimal progressivity of the income tax code. February 1, 2015 abstract we develop a model for determining the optimal high income linear tax. Optimal capital income taxation and redistribution ulrik e ludden univ ersit y of mannheim jan uary 2000 abstract this pap er studies the e ects of agen t heterogeneit y on optimal capital income tax rates. This limitation is empirically counterfactual as individuals differ. Optimal income tax and redistribution matti tuomala. The social welfare function used is typically a function of individuals utilities, most commonly some form of utilitarian function, so the tax system is chosen to maximise the aggregate of individual utilities. Using elasticities to derive optimal income tax rates emmanuel saez nber working paper no. This is the diamond 1998 optimal tax formula which he derives using. In contrast, starting from the influential papers of diamond 1998 and saez 2001, most recent quantitative papers have argued that marginal tax rates should be.
An empirical analysis of joint and individual taxation in this paper we develop a discrete model of optimal taxation of married couples and empirically discuss the optimality of income taxation for this group. Double limit analysis of optimal personal income taxation. Tax incidence and implications for optimal income tax rates richard k. A complete solution to a class of principalagent problems with an application to the control of a selfmanaged firm. Optimal capital income taxation is a subarea of optimal tax theory which refers to the study of designing a tax on capital income such that a given economic criterion like utility is optimized. Link theory to data on income distributions and empirical elasticities allow for statements about the optimal marginal tax rate prole perturbation approach to deriving optimal tax formulas considering small tax reforms around.
Starting from the conceptualization of capital income as future consumption, the taxation of capital income corresponds to a differentiated consumption tax on present and future. Ootttpppaa new york state department of taxation and finance office of tax policy analysis annual statistical report august 2001 analysis of 1998 personal income tax returns profile of income, deductions, credits and tax george e. In a broad class of models, optimal taxation problems have the characteristic that the government taxes at a high rate in the initial periods to build up a surplus capital income taxation 95. Diamond 1998 reopened the debate on the optimal shape of income tax by showing an example of optimal increasing marginal tax rates schedule. We show that in models in which labor services are supplied jointly with human capital, the chamley and judd result on zero capital income taxation in the limit extends to labor taxes as long as accumulation technologies are constant returns to scale. Gregory mankiw, matthew weinzierl, and danny yagan n. Yet, economists have stressed the tradeoff between these objectives. Using elasticities to derive optimal income tax rates. Gregory mankiw is professor of economics, matthew weinzierl is assistant professor of business administration, and danny yagan is a ph. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. Optimal income taxation when asset taxation is limited.
A synthesis by robin boadway, queens university, canada motohiro sato, hitotsubashi university, japan january, 2012 abstract we study optimal nonlinear income taxation when earnings can di. Key simplification is the lack of income effects diamond, 1998. Students may use the printed text or the smartbook with connect. Using the mirrlees optimal income tax model with quasilinear preferences, the paper. Optimal income taxation with multidimensional taxpayer types kenneth l. We consider the optimal progressivity of earnings taxation and whether capital income should be taxed. Mirrlees meets ramsey jonathan heathcotey federal reserve bank of minneapolis and cepr hitoshi tsujiyamaz goethe university frankfurt september, 2019 abstract what is the optimal shape of the income tax schedule. In a t w o p erio d mo del with arbitrarily man y heterogeneous agen ts, w e explicitly deriv e the w elfare e ects of taxation dep ending. October 31, 2014 abstract we develop a model for determining the optimal high income linear tax. With a linear tax schedule the marginal tax rate is shown to decrease with the number of children, while the relationship between the. A tale of three elasticities by thomas piketty, emmanuel saez and stefanie stantcheva. Revesz 1989 also attempted to express the mirrlees formulas in terms of elasticities. An exemple with a ushaped pattern of optimal marginal tax rates, working papers 9414, massachusetts institute of technology mit, department of economics.
Optimal nonlinear income taxation with costly tax avoidance. Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that maximises a social welfare function subject to economic constraints. The main message is that distortionary indirect taxation can circumvent the agency problem of the household. Questions regarding the interaction between optimal income taxation and inequality remain to be addressed in future work. Economic fluctuations and growth, public economics in an economy with identical infinitelylived households that obtain utility from leisure as well as consumption, chamley 1986 and judd 1985 have shown that the optimal tax system to pay. This paper shows that limitations in asset taxation have important consequences for the taxation of labor income. An example with a ushaped pattern of optimal marginal tax rates by peter a. Diamond 1998 extends this analysis by developing a case in which a ushaped pattern of marginal tax rates arises from a utility function for which income effects on labour supply are zero. This paper studies the role of family size in the design of optimal income taxation. A special attention is given to one of the effects. Optimal income taxation sciences po department of economics. This book provides a comprehensive survey of optimal income tax theory, following the development of research strategy from the basic mirrlees model through to its refinements, examining how optimal tax rates and the shape of tax schedules are affected by new considerations.
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