Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/162984
Authors: 
Hansen, Emanuel
Year of Publication: 
2017
Series/Report no.: 
Preprints of the Max Planck Institute for Research on Collective Goods 2017/10
Abstract: 
This paper studies optimal non-linear income taxation in an empirically plausible model with labor supply responses at the intensive (hours, effort) and the extensive (participation) margin. In this model, redistributive taxation gives rise to a previously neglected trade-off between two aspects of effciency: To reduce the deadweight loss from distortions at the extensive margin, the social planner has to increase distortions at the intensive margin and vice versa. Due to this trade-off, minimizing the overall deadweight loss requires to distort labor supply by low-skill workers upwards at both margins. Building on these insights, the paper is the first to provide conditions under which social welfare is maximized by an Earned Income Tax Credit with negative marginal taxes and negative participation taxes at low income levels.
Subjects: 
Optimal income taxation
Extensive margin
Intensive margin
JEL: 
H21
H23
D82
Document Type: 
Working Paper

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