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Pareto Efficient Income Taxation with Stochastic Abilities

Stephen Coate () and Marco Battaglini ()

No 140, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies Pareto e.cient 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 e.cient income tax systems can be time-consistent even when the degree of correlation in ability types is large

Keywords: dynamic taxation (search for similar items in EconPapers)
JEL-codes: E62 D90 D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pub
Date: 2004
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Journal Article: Pareto efficient income taxation with stochastic abilities (2008) Downloads
Working Paper: Pareto Efficient Income Taxation with Stochastic Abilities (2003) Downloads
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