NONLINEAR TAX INCIDENCE AND OPTIMAL TAXATION IN GENERAL EQUILIBRIUM

We study the incidence of nonlinear labor income taxes in an economy with a continuum of endogenous wages. We derive in closed form the effects of reforming nonlinearly an arbitrary tax system, by showing that this problem can be formalized as an integral equation. Our tax incidence formulas are val...

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Bibliographic Details
Published in:Econometrica 2020-03, Vol.88 (2), p.469-493
Main Authors: Sachs, Dominik, Tsyvinski, Aleh, Werquin, Nicolas
Format: Article
Language:English
Subjects:
Economics and Finance
Endogenous
Equilibrium
general equilibrium
Humanities and Social Sciences
Income taxes
nonlinear taxes
optimal income taxation
Optimal taxation
Tax incidence
Tax rates
Taxation
trickle‐down effects
Wages & salaries
Wisdom
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Summary:We study the incidence of nonlinear labor income taxes in an economy with a continuum of endogenous wages. We derive in closed form the effects of reforming nonlinearly an arbitrary tax system, by showing that this problem can be formalized as an integral equation. Our tax incidence formulas are valid both when the underlying assignment of skills to tasks is fixed or endogenous. We show qualitatively and quantitatively that contrary to conventional wisdom, if the tax system is initially suboptimal and progressive, the general-equilibrium “trickle-down” forces may raise the benefits of increasing the marginal tax rates on high incomes. We finally derive a parsimonious characterization of optimal taxes.
ISSN:0012-9682
1468-0262
DOI:10.3982/ECTA14681