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Session Overview
L01: Optimal Taxation
Friday, 20/Aug/2021:
2:15pm - 3:45pm

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2:15pm - 2:37pm

Tax Preferences and Optimal Income Taxation

Marcelo Arbex1, Enlinson Mattos2

1University of Windsor, Canada; 2São Paulo School of Economics, Fundacão Getulio Vargas

We develop a two-agent model where agents have preferences over consumption, leisure, and independent and interdependent tax preferences. We characterize the optimal labor income taxation under different assumptions regarding tax preferences (tax affinity, hostility, conformity and opposition). We find that tax preferences can either amplify or reduce the marginal tax increase of the low-ability type. When individuals can hide a fraction of their earnings at a resource cost, the link between consumption and tax payments is broken. Tax evasion affects the aggregate measure of taxes and what people take into account and care about when making their optimal decisions. We find that the trade-off associated with tax preferences and consumption have their effects intensified in the optimal low-ability income tax. With evasion, the marginal income tax of high-ability types is no longer zero - it is optimal to subsidize this type and avoid the mimicking of low-ability individuals.

Arbex-Tax Preferences and Optimal Income Taxation-201.pdf

2:37pm - 3:00pm

Sufficient Statistics for Nonlinear Tax Systems with Preference Heterogeneity

Antoine Ferey1, Benjamin Lockwood2, Dmitry Taubinsky3

1CREST, Ecole Polytechnique, France; 2Wharton & NBER; 3UC Berkeley & NBER

A prominent justification for taxation of capital income, capital income, savings, bequests, and certain commodities is that taxes on consumption categories preferred by those with higher earnings ability are efficient even in the presence of nonlinear earnings taxation. This paper provides a method for characterizing optimal nonlinear tax systems in the presence of correlated preference heterogeneity using sufficient statistics that can be estimated from behavioral responses to tax reforms. Our results encompass tax systems that implement the optimal mechanism, as well as simpler tax systems such as those that involve a nonlinear earnings tax and a separable nonlinear capital income tax, or those that involve a nonlinear earnings tax and an earnings- dependent but otherwise linear capital income tax. All optimal tax systems can be expressed using a simple sufficient statistic for preference heterogeneity. Our sufficient-statistic formulas for optimal differential commodity taxes produce empirically-implementable generalizations of the Atkinson-Stiglitz theorem.

Ferey-Sufficient Statistics for Nonlinear Tax Systems with Preference Heterogeneity-150.pdf

3:00pm - 3:22pm

Comprehensive or Schedular Income Taxation? A General Equilibrium Approach with Nonlinear Taxation

Laurence Jacquet1, Etienne Lehmann2

1CY Cergy Paris Université, CNRS, THEMA; 2CRED(TEPP), Université Paris II Panthéon-Assas, France

In a general equilibrium framework, we develop a model of income taxation spanning several types of incomes with multidimensional taxpayer heterogeneity. Starting from any tax schedule, our framework allows one to decide which, of a more comprehensive or a more schedular income tax, is more welfare- and efficiency -improving. We express the effects of any tax reform as well as optimal tax formulas in terms of the usual sufficient statistics plus some new ones including mean cross-base responses and general equilibrium effects. These formulas are taken to French data to simulate optimal taxes on labor and capital incomes.

Jacquet-Comprehensive or Schedular Income Taxation A General Equilibrium Approach with Nonlinear Taxation-333.pdf

3:22pm - 3:45pm

Optimal Redistribution or Predistribution? Minimum Wages vs Income Taxes when Workers Differ in Both Hourly Wages and Working Hours

Aart Gerritsen

Erasmus University Rotterdam

Most theoretical studies have a hard time finding a useful role for the minimum wage alongside the income tax. Virtually all of these studies assume a one-to-one correspondence between wages and income. I reconsider the case for the minimum wage when people differ in both wages and preferences for work, such that a given level of income may correspond to different wage rates. This renders the minimum wage unambiguously desirable in a discrete-type labor market à la Stiglitz (1982). But desirability of the minimum wage is ambiguous and subject to a policy trade-off in a continuous-type labor market à la Mirrlees (1971). Compared to the minimum wage, income taxes are less effective in affecting the wage distribution but more effective in redistributing income. The desirability of the minimum wage depends on this trade-off between the "predistributive" benefits of the minimum wage and the "redistributive" benefits of the income tax.

Gerritsen-Optimal Redistribution or Predistribution Minimum Wages vs Income Taxes when Workers Differ-267.pdf

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