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Structure of the optimal income tax in the quasi‐linear model
Author(s) -
Hashimzade Nigar,
Myles Gareth D.
Publication year - 2007
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2007.00044.x
Subject(s) - economics , econometrics , consumption (sociology) , range (aeronautics) , tax rate , optimal tax , income tax , monte carlo method , function (biology) , microeconomics , mathematics , monetary economics , statistics , public economics , social science , materials science , evolutionary biology , sociology , composite material , biology
Existing numerical characterizations of the optimal income tax have been based on a limited number of model specifications. As a result, they do not reveal which properties are general. We determine the optimal tax in the quasi‐linear model under weaker assumptions than have previously been used; in particular, we remove the assumption of a lower bound on the utility of zero consumption and the need to permit negative labor incomes. A Monte Carlo analysis is then conducted in which economies are selected at random and the optimal tax function constructed. The results show that in a significant proportion of economies the marginal tax rate rises at low skills and falls at high. The average tax rate is equally likely to rise or fall with skill at low skill levels, rises in the majority of cases in the centre of the skill range, and falls at high skills. These results are consistent across all the specifications we test. We then extend the analysis to show that these results also hold for Cobb‐Douglas utility.