Optimal Nonlinear Taxation: The Dual Approach

Aart Gerritsen

Working Papers from Max Planck Institute for Tax Law and Public Finance

Abstract: The usual method of solving for an optimal nonlinear tax schedule is that of the primal approach – ï¬ rst solving for the optimal allocation, and subsequently determining which tax system decentralizes this allocation. While this method is mathematically rigorous, it lacks intuitive appeal. I propose a different method based on the dual approach – directly solving for the optimal tax system – which is equally rigorous, while being much closer in spirit to actual tax policy. I show that this approach can easily incorporate preference heterogeneity, as well as individual behavior that is not fully consistent with utility maximization. Over and above solving for the optimum, the dual approach allows one to obtain new insights into the welfare effects of small nonlinear tax reforms outside the optimum.

Keywords: Optimal taxation; dual approach; preference heterogeneity; individual misoptimization; tax reforms (search for similar items in EconPapers)
JEL-codes: H21 H23 H24 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2016-01
New Economics Papers: this item is included in nep-acc, nep-pbe, nep-pub and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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