Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium

Dominik Sachs, Aleh Tsyvinski and Nicolas Werquin

No 11497, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Tax incidence; Optimal taxation; Tax reforms; General equilibrium (search for similar items in EconPapers)
JEL-codes: H21 H22 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
https://cepr.org/publications/DP11497 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium (2020)
Working Paper: Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium (2020)
Working Paper: Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium (2019)
Working Paper: Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium (2016)
Working Paper: Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:11497

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP11497

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().