The Optimal Marginal Tax Rates with both Extensive and Intensive Responses

Laurence Jacquet, Etienne Lehmann and Bruno Van der Linden

Photo: Journal of Economic Theory

Published in:

Journal of Economic Theory 148 (5) pp. 1770-1805

Link to the paper

Abstract:

We study optimal income taxation when labor supply reacts along the intensive and extensive margins. Individuals are heterogeneous across two unobserved dimensions: their skill and disutility of participation. We develop a new method to analytically derive conditions under which optimal marginal tax rates are non-negative everywhere. It is typically optimal to provide a distinct level of transfer to the non-employed and to workers with negligible earnings. Numerical simulations illustrate these properties for the US. We also apply our method to sign output distortions in other adverse selection frameworks with random participation, namely the monopoly nonlinear pricing and the regulatory monopoly problems.

Published Apr. 22, 2016 3:42 PM - Last modified June 28, 2019 12:36 PM