Premium
What Should Optimal Income Taxes Smooth?
Author(s) -
Andersen Torben M.,
Dogonowski Robert R.
Publication year - 2004
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2004.00176.x
Subject(s) - economics , income tax , productivity , smoothing , constant (computer programming) , gross income , tax rate , optimal tax , labour economics , international taxation , monetary economics , microeconomics , state income tax , macroeconomics , econometrics , tax reform , public economics , mathematics , programming language , statistics , computer science
According to the theory of tax smoothing, income tax rates should be kept constant so as to minimize the distortionary costs of taxation. By explicitly considering how labor supply is distorted by income taxes in a fully specified intertemporal model, we find that the optimal income tax policy should smoothen leisure. In the case of varying income (productivity changes) this is attained by a pro‐cyclical (progressive) tax rate.