Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/147343
Authors: 
Sachs, Dominik
Tsyvinski, Aleh
Werquin, Nicolas
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper 6089
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.
Subjects: 
nonlinear tax policy
tax incidence
optimal taxation
general equilibrium
JEL: 
H20
H21
H22
Document Type: 
Working Paper

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