A Variational Approach to the Analysis of Tax Systems

Mikhail Golosov, Aleh Tsyvinski and Nicolas Werquin

No 20780, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a general method to study the effects of non-linear taxation in dynamic settings using variational arguments. We first derive general theoretical formulas that characterize the welfare effects of local tax reforms and, in particular, the optimal tax system, potentially restricted within certain classes (e.g., age-independent, linear, separable). These formulas are expressed in terms of intuitive parameters, such as the labor and capital income elasticities and the hazard rates of the income distributions. Second, we apply these formulas to various specific settings. In particular, we decompose the gains arising from each element of tax reform, starting from a simple baseline system, as the available tax instruments becomes more sophisticated. We further show that the design of tax systems obeys a common general principle, namely that more sophisticated tax instruments (e.g., age-dependent, non-linear, non-separable) allow the government to fine-tune the tax rates by targeting higher distortions to the segments of the population whose behavior responds relatively little to those taxes.

JEL-codes: H21 H23 (search for similar items in EconPapers)
Date: 2014-12
Note: EFG PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (92)

Downloads: (external link)
http://www.nber.org/papers/w20780.pdf (application/pdf)

Related works:
Working Paper: A Variational Approach to the Analysis of Tax Systems (2015)
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:nbr:nberwo:20780

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w20780

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().