The Simple Economics of Bunching: Optimal Taxation with Quasi‐Linear Preferences

Jan Boone and Lans Bovenberg

Journal of Public Economic Theory, 2007, vol. 9, issue 1, 89-105

Abstract: This paper models unemployment as a binding nonnegativity constraint on hours worked in an optimal income tax problem with quasi‐linear preferences. We show that bunching of workers resulting from this binding constraint provides a more convincing description of the bottom of the labor market than bunching due to violation of the second‐order condition for individual optimization. Although a binding nonnegativity constraint destroys the closed form solution of optimal marginal tax rates, the optimal tax problem can be characterized in a two‐dimensional diagram in which comparative statics can be performed in straightforward fashion.

Date: 2007
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https://doi.org/10.1111/j.1467-9779.2007.00299.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jpbect:v:9:y:2007:i:1:p:89-105

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