Practical Optimal Income Taxation
Jonathan Heathcote () and
No 626, Staff Report from Federal Reserve Bank of Minneapolis
We review methods used to numerically compute optimal Mirrleesian tax and transfer schedules in heterogeneous agent economies. We show that the coarseness of the productivity grid, while a technical detail in terms of theory, is critical for delivering quantitative policy prescriptions. Existing methods are reliable only when a very fine grid is used. The problem is acute for computational approaches that use a version of the Diamond-Saez implicit optimal tax formula. If using a very fine grid for productivity is impractical, then optimizing within a flexible parametric class is preferable to the non-parametric Mirrleesian approach.
Keywords: Ramsey taxation; Optimal income taxation; Mirrlees taxation (search for similar items in EconPapers)
JEL-codes: H21 H24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:92932
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