Optimal Nonlinear Income Taxation with Multidimensional Types: The Case with Heterogeneous Behavioral Responses

Laurence Jacquet and Etienne Lehmann ()

No 2014-01, THEMA Working Papers from THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise

Abstract: This paper develops a general method to solve the optimal nonlinear income tax model with one action (individual pre-tax income) and multidimensional characteristics. Individuals differ in terms of skills and belong to different groups. A group is a subset of individuals with the same vector of characteristics but distinct skill levels. Assuming the Spence-Mirrlees single-crossing condition (with respect to the level of skill) in each group,we first derive the optimal second-best allocation. We then show how this optimality condition leads to a tax formula in terms of behavioral responses, social welfare weights and income density in the vein of Saez (2001). However, our multidimensional context implies that all these terms are averaged across individuals who earn the same income. We also show how our method can be used to solve a large set of policy relevant problems for which it is crucial to introduce multidimensional heterogeneity, e.g., joint taxation of households,nonlinear pricing of a monopoly.

Date: 2014
New Economics Papers: this item is included in nep-pub
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Citations: View citations in EconPapers (6)

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