Optimal Piecewise Linear Income Taxation
Patricia F. Apps, Ngo Van Long and Ray Rees
Photo: Journal of Economic Theory
Journal of Economic Theory 16 (4) pp. 523-545.
Given its significance in practice, piecewise linear taxation has received relatively little attention in the literature. This paper offers a simple and transparent analysis of its main characteristics. We fully characterize optimal tax parameters for the cases in which budget sets are convex and nonconvex respectively. A numerical analysis of a discrete version of the model shows the circumstances under which each of these cases will hold as a global optimum. We find that, given plausible parameter values and wage distributions, the globally optimal tax system is convex, and marginal rate progressivity increases with rising inequality.