A Theory of Asset Prices Based on Heterogeneous Information
Aleh Tsyvinski () and
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Dominik Sachs: European University Institute
Aleh Tsyvinski: Cowles Foundation, Yale University, http://economics.yale.edu/people/aleh-tsyvinski
Nicolas Werquin: Toulouse School of Economics
No 2051, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University
We study the incidence and the optimal design of nonlinear income taxes in a Mirrleesian economy with a continuum of endogenous wages. We characterize analytically the incidence of any tax reform by showing that one can mathematically formalize this problem as an integral equation. For a CES production function, we show theoretically and numerically that the general equilibrium forces raise the revenue gains from increasing the progressivity of the U.S. tax schedule. This result is reinforced in the case of a Translog technology where closer skill types are stronger substitutes. We then characterize the optimum tax schedule, and derive a simple closed-form expression for the top tax rate. The U-shape of optimal marginal tax rates is more pronounced than in partial equilibrium. The joint analysis of tax incidence and optimal taxation reveals that the economic insights obtained for the optimum may be reversed when considering reforms of a suboptimal tax code.
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