Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/36898 
Year of Publication: 
2010
Series/Report no.: 
IZA Discussion Papers No. 4837
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
This paper characterizes optimal income taxation when individuals respond along both the intensive and extensive margins. Individuals are heterogeneous across two dimensions: specifically, their skill and disutility of participation. Preferences over consumption and work effort can differ with respect to the level of skill, with only the Spence-Mirrlees condition imposed. Employing a tax perturbation approach, we derive an optimal tax formula that generalizes previous results by allowing for income effects and extensive margin responses. We provide a sufficient condition for optimal marginal tax rates to be nonnegative everywhere. We discuss the relevance of this condition with analytical examples and numerical simulations using U.S. data.
Subjects: 
Optimal tax formula
tax perturbation
random participation
JEL: 
H21
H23
Document Type: 
Working Paper

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