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Optimal income taxation without single-crossing

Number: 129
Year: 2019
Author(s): Spencer Bastani, Soren Blomquisty, Luca Michelettoz
Keywords: Optimal nonlinear income taxation; single-crossing condition; multidi-mensional heterogeneity; redistribution.
In this paper we set up a simple two-type optimal nonlinear income tax model where the single-crossing condition is violated, and we characterize the properties of a second-best optimum by considering the entire second-best Pareto frontier. The violation of single-crossing is generated by the assumption that agents dier both in terms of market abilities and in terms of their needs for a work-related good. Our analysis highlights several non-standard features of a second-best optimum. In particular, we show that a nonlinear income tax may allow the government to convert a pooling laissez-faire equilibrium into a separating equilibrium, that the second-best Pareto frontier may be discontinuous, and that a second-best optimum may not preserve the income ranking prevailing under laissez-faire. Finally, we also show that at a second-best optimum the labor supply of some agents might be distorted even though no self-selection constraint is (locally) binding in equilibrium.

Spencer Bastani  Department of Economics and Statistics, Linnaeus University; Linnaeus University Center for Integration and Discrimination Studies; Uppsala Center for Fiscal Studies; Uppsala Center for Labor Studies; CESifo, Germany.

Soren Blomquist Department of Economics, Uppsala University; Uppsala Center for Fiscal Studies; CESifo, Germany.

Luca Michelettoz Department of Law "C. Beccaria", University of Milan; Dondena Center for Research on Social Dynamics, Bocconi University; Uppsala Center for Fiscal Studies; CESifo, Germany.

Language: English

The paper may be downloaded here.