Working Paper: NBER ID: w18228
Authors: Casey Rothschild; Florian Scheuer
Abstract: We consider optimal redistribution in a model where individuals can self-select into one of several possible sectors based on heterogeneity in a multidimensional skill vector. We first show that when the government does not observe the sectoral choice or underlying skills of its citizens, the constrained Pareto frontier can be implemented with a single non-linear income tax. We then characterize this optimal tax schedule. If sectoral inputs are complements, a many-sector model with self-selection leads to optimal income taxes that are less progressive than the corresponding taxes in a standard single-sector model under natural conditions. However, they are more progressive than in canonical multi-sector economies with discrete types and without occupational choice or overlapping sectoral wage distributions.
Keywords: Optimal Taxation; Redistribution; Roy Model; Labor Economics
JEL Codes: D5; D80; E2; H2; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax policy (H20) | sectoral choices (O14) |
| tax policy (H20) | wage distributions (J31) |
| lowering taxes on high earners (H31) | effort in the high-income sector (D29) |
| effort in the high-income sector (D29) | indirect redistribution to low-income workers in the complementary sector (F16) |
| tax policy (H20) | optimal top income tax rate (H21) |