On The Ambiguous Sign of the Optimal Utilitarian Marginal Income Tax

Emanuel Hansen

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: The paper studies optimal income taxation in a model with labor supply responses at the intensive and the extensive margin. It is shown that a utilitarian desire for redistribution does not pin down the sign of the optimal marginal tax rate: labor supply may be downward distorted, undistorted, or even upward distorted at both margins. The paper provides suffi cient conditions for the optimality of an EITC-style tax/transfer scheme under which labor supply is upward distorted at both margins for some skill groups. Furthermore, the paper shows optimal upward distortions at the intensive margin are driven by a non-standard tradeoff between effi ciency at the intensive margin and effi ciency at the extensive margin.

JEL-codes: D82 H21 H23 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100435

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