Negative marginal tax rates and heterogeneity

Philippe Choné and Guy Laroque

No W09/12, IFS Working Papers from Institute for Fiscal Studies

Abstract:

Heterogeneity is likely to be an important determinant of the shape of optimal tax schemes. This article addresses the issue in a model à la Mirrlees with a continuum of agents. The agents differ in their productivities and opportunity costs of work, but their labor supplies depend only on a unidimensional combination of their two characteristics. Conditions are given under which the standard result that marginal tax rates are everywhere non-negative holds. This is in particular the case when work opportunity costs are distributed independently of productivities. But one can also get negative marginal tax rates: economies where negative tax rates are optimal at the bottom of the income distribution are studied, and a numerical illustration is given, based on UK data.

Keywords: Optimal taxation; heterogeneity; welfare. (search for similar items in EconPapers)
JEL-codes: H21 H31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic, nep-pbe and nep-pub
Date: 2009-05
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Persistent link: http://EconPapers.repec.org/RePEc:ifs:ifsewp:09/12

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