EconPapers    
Economics at your fingertips  
 

Direct and Indirect Taxation when Households Differ in Market and Non-market Abilities

Alessandro Balestrino, Alessandro Cigno and Anna Pettini

No 181, CESifo Working Paper Series from CESifo

Abstract: How are optimal taxation rules affected when households differ in their non-market, as well as in their market skills? Where income taxation is concerned, the policy prescription applying in the case where households are differentiated only by wage rate (namely, that high-wage households should be taxed more than low-wage households, but that marginal income tax rate on the former should be zero) may be reversed when there are also differences in household production skills. Such a reversal is not very likely, however, because there are efficiency gains in subsidizing households with a comparative advantage in non-market activities. Indeed, simulations with a wide range of parameter values show that redistribution is always in favour of low-wage households, and that the amount redistributed increases with the non-market skills of the latter. If households differ in both market and non-market skills, we also find that the introduction of indirect taxation alongside income taxation my be welfare-improving, because it helps relax the incentive constraint, even when the utility function is separable in labour. This contradicts the Atkinson-Stiglitz theorem. The shift from direct to indirect taxation/subsidization allows the optimal marginal rate of income tax on potential mimickers to be different from zero. This is confirmed by simulation experiments.

Date: 1999
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.cesifo.org/DocDL/ces_wp181.pdf (application/pdf)

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:ces:ceswps:_181

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().

 
Page updated 2025-03-30
Handle: RePEc:ces:ceswps:_181