 Optimal linear and two-bracket income taxes with idiosyncratic earnings riskMinchung Hsu and C.C. Yang Journal of Public Economics, 2013, vol. 105, issue C, 58-71 Abstract: This paper quantitatively characterizes optimal linear and two-bracket income taxes. We consider a dynamic-stochastic-general-equilibrium model in which tax design involves redistributing income for both equity and social insurance. Substantive findings include: (i) a significant fraction of agents supply zero labor or hold zero assets at the optimum; (ii) neglecting tax distortion imposed on either of labor–leisure and consumption–saving decisions will lead to the prescription of tax codes that deviate substantially from the optimum; and (iii) the optimal two-bracket tax schedule will turn from regressivity to progressivity in the marginal tax rate once the volatility of idiosyncratic shocks becomes sufficiently large. The last finding is consistent with the results in Apps et al. (forthcoming), and it also reconciles the contradictory results regarding the optimal two-bracket tax schedule between Slemrod et al. (1994) and Strawczynski (1998). Keywords: Optimal taxation; Piecewise linear tax; Idiosyncratic risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:105:y:2013:i:c:p:58-71 DOI: 10.1016/j.jpubeco.2013.06.006 Access Statistics for this article Journal of Public Economics is currently edited by R. Boadway and J. Poterba More articles in Journal of Public Economics from Elsevier |
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