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On optimal income taxation with heterogeneous work preferences
Author(s) -
Tarkiainen Ritva,
Tuomala Matti
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.1742-7363.2007.00045.x
Subject(s) - economics , earnings , redistribution (election) , order (exchange) , work (physics) , microeconomics , productivity , income tax , econometrics , function (biology) , mathematical economics , public economics , macroeconomics , mechanical engineering , accounting , finance , evolutionary biology , politics , biology , political science , law , engineering
This paper considers the problem of optimal income taxation when individuals are assumed to differ with respect to their earnings potential and work preferences. A numerical method for solving this two‐dimensional problem has been developed. We assume an additive utility function, and utilitarian social objectives. Rather than solve the first order conditions associated with the problem, we directly compute the best tax function, which can be written in terms of a second order B‐spline function. Our findings show that marginal tax rates are higher than might be anticipated, and that very little bunching occurs at the optimum. Our simulation results show that the correlation between taste for work and productivity has a crucial role in determining the extent of redistribution in our model.