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Nonlinear and piecewise linear income taxation, and the subsidization of work-related goods

Spencer Bastani (), Sören Blomquist and Luca Micheletto ()
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Luca Micheletto: Uppsala Center for Fiscal Studies

International Tax and Public Finance, 2019, vol. 26, issue 4, 806-834

Abstract: Abstract We investigate how the social welfare gain of subsidizing work-related goods depends on whether the underlying income tax system is linear, piecewise linear or fully nonlinear, focusing on child care services as a paradigmatic example of goods/services that are complements with labor supply. Our quantitative analysis employs an empirically relevant labor supply model and shows that the welfare gain of an optimally chosen subsidy is negligible when the optimal income tax is restricted to be linear but about the same as under fully nonlinear taxation when the optimal income tax is restricted to be piecewise linear. Our findings enhance the policy relevance of the optimal tax argument in favor of providing subsidies to work-related goods and also shed light on the relative welfare gains of employing piecewise linear rather than fully nonlinear income taxes.

Keywords: Optimal income taxation; Tagging; Piecewise linear taxation; Child care subsidies (search for similar items in EconPapers)
JEL-codes: H21 H42 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:kap:itaxpf:v:26:y:2019:i:4:d:10.1007_s10797-019-09532-1