Optimal Taxation with Multiple Dimensions of Heterogeneity

Katy Bergstrom and William Dodds

No 9572, Policy Research Working Paper Series from The World Bank

Abstract: This paper develops a general theory of optimal income taxation with multiple dimensions of agent heterogeneity. The main technical hurdle in developing this theory is the possibility that individuals have multiple optimal incomes. Using a perturbation approach, optimal tax formulas are derived that account for the possibility that individuals have multiple optima and, hence, account for the possibility that individuals jump between their optimal income levels when the tax schedule is perturbed. The magnitude of these effects is quantified, thereby augmenting the optimal tax formulas from Saez (2001) with additional “jumping effect†terms. The paper provides a partial characterization of when individuals with multiple optimal incomes may exist under the optimal tax schedule. Finally, the paper derives a new methodology to simulate optimal income tax schedules with multidimensional heterogeneity. This method is implemented numerically, showing that individuals with multiple optimal income levels can exist under the optimal tax schedule.

Keywords: Macro-Fiscal Policy; Public Sector Economics; Public Finance Decentralization and Poverty Reduction; Economic Adjustment and Lending; Labor Markets; Services&Transfers to Poor; Economic Assistance; Access of Poor to Social Services; Disability; Taxation&Subsidies (search for similar items in EconPapers)
Date: 2021-03-08
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://documents.worldbank.org/curated/en/81204161 ... of-Heterogeneity.pdf (application/pdf)

Related works:
Journal Article: Optimal taxation with multiple dimensions of heterogeneity (2021)
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:wbk:wbrwps:9572

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().