Working Paper: NBER ID: w3968
Authors: Alberto Alesina; Philippe Weil
Abstract: Relative to traditional piecewise linear income taxation schemes, it is possible to increase government revenues by offering to consumers a menu of linear income tax schedules. In the resulting Pareto-superior equilibrium, consumers sort themselves out according to their (unobservable) productivity level, with high productivity agents choosing the tax schedules with low marginal tax rate and high intercept. This scheme extracts from the economy an unexploited source of revenue which, in contrast with standard supply-side proposals, does not depend on the economy being on the downward-sloping side of the Laffer curve.
Keywords: Income Taxation; Tax Schedules; Government Revenue
JEL Codes: H21; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of a second tax schedule (H29) | sorting of consumers based on productivity (D26) |
| introduction of a menu of linear income tax schedules (H31) | self-selection of consumers based on productivity (J24) |
| self-selection of consumers based on productivity (J24) | Pareto superior equilibrium (D69) |
| high productivity consumers (D16) | choose tax schedule with lower marginal tax rate (H21) |
| choose tax schedule with lower marginal tax rate (H21) | increase in labor supply and consumption among high productivity workers (J29) |
| increase in labor supply and consumption among high productivity workers (J29) | higher tax revenues (H29) |