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Practical Optimal Income Taxation

Jonathan Heathcote () and Hitoshi Tsujiyama

No 626, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: 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)
Date: 2021-07-30
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

DOI: 10.21034/sr.626

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