Working Paper: CEPR ID: DP15721
Authors: Laurence Jacquet; Etienne Lehmann
Abstract: We propose a new method, that we call an allocation perturbation, to derive the optimal nonlinear income tax schedules with multidimensional individual characteristics on which taxes cannot be conditioned. It is well established that, when individuals differ in terms of preferences on top of their skills, optimal marginal tax rates can be negative. In contrast, we show that with heterogeneous behavioral responses and skills, one has optimal positive marginal tax rates, under utilitarian preferences and maximin.
Keywords: optimal taxation; mechanism design; multidimensional screening problems; allocation perturbation
JEL Codes: H21; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| individual characteristics (Z13) | optimal marginal tax rates (H21) |
| heterogeneous behavioral responses and skills (D29) | optimal marginal tax rates (H21) |
| optimal marginal tax rates (H21) | positive marginal tax rates (H29) |
| marginal rate of substitution (D11) | optimal tax schedule (H21) |
| individual characteristics (Z13) | marginal social welfare weights (D69) |
| marginal social welfare weights (D69) | optimal tax schedule (H21) |