Pareto Efficient Income Taxation with Stochastic Abilities
Marco Battaglini () and
Stephen Coate ()
No 10119, NBER Working Papers from National Bureau of Economic Research, Inc
This paper studies Pareto efficient income taxation in an economy with infinitely-lived individuals whose income generating abilities evolve according to a two-state Markov process. The study yields two main results. First, when individuals are risk neutral, the fraction of individuals who face a positive marginal income tax rate is always positive but converges to zero. Moreover, the tax rate these individuals face also goes to zero. Second, Pareto efficient income tax systems can be time-consistent even when the degree of correlation in ability types is large.
JEL-codes: H21 (search for similar items in EconPapers)
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Published as Battaglini, Marco & Coate, Stephen, 2008. "Pareto efficient income taxation with stochastic abilities," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 844-868, April.
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