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Optimal Income Taxation with a Stationarity Constraint in a Dynamic Stochastic Economy

Marcus Berliant () and Shota Fujishima

MPRA Paper from University Library of Munich, Germany

Abstract: We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government cannot change the tax rule as uncertainty resolves. Due to such a stationarity constraint, our taxation problem is reduced to a static one over an expanded type space. We strengthen the argument in the static model that the zero top marginal tax rate result is of little practical importance because it is actually relevant only when the top earner in the initial period receives the highest shock in every subsequent period. Under a general stochastic structure such that the support of types moves over time, all people’s allocations are almost surely distorted in any period.

Keywords: Optimal income taxation; New dynamic public finance (search for similar items in EconPapers)
JEL-codes: H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pub
Date: 2015-01-28
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Related works:
Journal Article: Optimal income taxation with a stationarity constraint in a dynamic stochastic economy (2017) Downloads
Working Paper: Optimal Income Taxation with a Stationarity Constraint in a Dynamic Stochastic Economy (2016) Downloads
Working Paper: Optimal income taxation with a stationarity constraint in a dynamic stochastic economy (2016) Downloads
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