Tax Design for the Long Run

Musab Kurnaz, Martin Michelini, Hakkı Özdenören and Christopher Sleet

Journal of Political Economy Macroeconomics, 2026, vol. 4, issue 1, 1 - 47

Abstract: Costs of adjustment hinder behavioral responses to tax changes. To capture these dynamics, we integrate a discrete choice framework into optimal tax theory. Long-run outcomes are identified with stationary distributions of workers across income-generating states, and optimal tax equations are expressed through the sensitivity of these distributions to consumption variation. We derive formulas that enable quantitative evaluation of substitution patterns. Novel equations establish marginal costs of inducing long-run population movements across states as sufficient statistics for optimal taxation. We analyze the implications of quantitative models of occupational and income choice for the design of optimal taxes.

Date: 2026
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