Working Paper: NBER ID: w22646
Authors: Dominik Sachs; Aleh Tsyvinski; Nicolas Werquin
Abstract: We study the incidence and the optimal design of nonlinear income taxes in a Mirrleesian economy with a continuum of endogenous wages. We characterize analytically the incidence of any tax reform by showing that one can mathematically formalize this problem as an integral equation. For a CES production function, we show theoretically and numerically that the general equilibrium forces raise the revenue gains from increasing the progressivity of the U.S. tax schedule. This result is reinforced in the case of a Translog technology where closer skill types are stronger substitutes. We then characterize the optimum tax schedule, and derive a simple closed-form expression for the top tax rate. The U-shape of optimal marginal tax rates is more pronounced than in partial equilibrium. The joint analysis of tax incidence and optimal taxation reveals that the economic insights obtained for the optimum may be reversed when considering reforms of a suboptimal tax code.
Keywords: nonlinear income taxes; optimal taxation; general equilibrium; tax incidence
JEL Codes: E62; H21; H22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| general equilibrium forces (D50) | revenue gains from increasing progressivity of the US tax schedule (H29) |
| raising marginal tax rates on low incomes (H31) | lower revenue gains compared to high incomes (H29) |
| optimal tax schedule should be more regressive (H21) | general equilibrium effects considered (D59) |
| shape of the optimal marginal tax rates (H21) | U-shaped (L68) |
| marginal tax rates increase more steeply for high incomes (H31) | shape of the optimal marginal tax rates (H21) |
| marginal tax rates decrease more steeply for low incomes (H31) | shape of the optimal marginal tax rates (H21) |
| optimal marginal tax rate (H21) | distribution of social welfare weights and elasticity of labor supply (H31) |
| results about optimal tax schedules may be reversed (H21) | reforms of a suboptimal tax code (H21) |