Optimal Income Taxation and Risk: The Extensive-Margin Case

Robin Boadway and Motohiro Sato

Annals of Economics and Statistics, 2014, issue 113-114, 159-183

Abstract: The optimal income tax structure is studied in a setting in which workers make discrete labor market decisions and earnings are uncertain. Workers differ continuously along a single dimension that reflects their skills as well as their disutility of work in different jobs. A discrete number of jobs-types are available in perfectly elastic supply. Each job yields a stochastic distribution of wages, where the distribution differs among skill-types. The amount of work in each job is fixed, so there is no intensive labor-supply decision and wages reflect earnings. Expected wages for a given job-type are higher for higher-skilled workers. Workers first choose a job based on the distribution of wages they expect to earn. Once jobs are chosen, wages are revealed and workers decide whether to accept the job or become voluntarily unemployed. Each job-type is associated with a distribution of wages, and the same wage will be paid by more than one job-type. Under reasonable conditions, workers segment themselves by skill levels into jobs. We analyze the optimal income tax structure given these two margins of decision-making, job choice and participation. The optimal tax will reflect insurance (since earnings are uncertain when jobs are chosen), redistribution (since persons of higher skills earn more), and efficiency (since taxes affect both job choice and participation).

Date: 2014
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.jstor.org/stable/10.15609/annaeconstat2009.113-114.159 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:2014:i:113-114:p:159-183

DOI: 10.15609/annaeconstat2009.113-114.159

Access Statistics for this article

Annals of Economics and Statistics is currently edited by Laurent Linnemer

More articles in Annals of Economics and Statistics from GENES Contact information at EDIRC.
Bibliographic data for series maintained by Secretariat General () and Laurent Linnemer ().