Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach

Kory Kroft, Kavan Kucko, Etienne Lehmann () and Johannes Schmieder

American Economic Journal: Economic Policy, 2020, vol. 12, issue 1, 254-92

Abstract: We derive a sufficient statistics tax formula in a model that incorporates unemployment and endogenous wages to study the shape of the optimal income tax. Key sufficient statistics are the macro employment response to taxation, the micro and macro participation response to taxation, and the wage-moderating effect of tax progressivity. We empirically implement the tax formula by estimating the micro and macro elasticities using policy variation from the United States. Our results suggest that the optimal tax more closely resembles a negative income tax than an earned income tax credit relative to the case where unemployment and wage responses are ignored.

JEL-codes: E24 H21 H23 H24 H31 J22 J31 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (20)

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Related works:
Working Paper: Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach (2020)
Working Paper: Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach (2017)
Working Paper: Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach (2017)
Working Paper: Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach (2016)
Working Paper: Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach (2015)
Working Paper: Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach (2015)
Working Paper: Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach (2015)
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DOI: 10.1257/pol.20180033

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