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NONLINEAR TAX INCIDENCE AND OPTIMAL TAXATION IN GENERAL EQUILIBRIUM

Econometrica, 2020-03, Vol.88 (2), p.469-493 [Peer Reviewed Journal]

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Title:
NONLINEAR TAX INCIDENCE AND OPTIMAL TAXATION IN GENERAL EQUILIBRIUM
Author: Sachs, Dominik ; Tsyvinski, Aleh ; Werquin, Nicolas
Subjects: Economics and Finance ; Endogenous ; Equilibrium ; general equilibrium ; Humanities and Social Sciences ; Income taxes ; Nonlinear ; nonlinear taxes ; optimal income taxation ; Optimal taxation ; Tax incidence ; Tax rates ; Taxation ; trickle‐down effects ; Wages & salaries ; Wisdom
Is Part Of: Econometrica, 2020-03, Vol.88 (2), p.469-493
Description: We study the incidence of nonlinear labor income taxes in an economy with a continuum of endogenous wages. We derive in closed form the effects of reforming nonlinearly an arbitrary tax system, by showing that this problem can be formalized as an integral equation. Our tax incidence formulas are valid both when the underlying assignment of skills to tasks is fixed or endogenous. We show qualitatively and quantitatively that contrary to conventional wisdom, if the tax system is initially suboptimal and progressive, the general-equilibrium “trickle-down” forces may raise the benefits of increasing the marginal tax rates on high incomes. We finally derive a parsimonious characterization of optimal taxes.
Publisher: Evanston: Wiley
Language: English
Identifier: ISSN: 0012-9682
EISSN: 1468-0262
DOI: 10.3982/ECTA14681
Source: HAL SHS: Archive ouverte en Sciences de l'Homme et de la Société (Open Access)

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