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Optimal Income Taxation with Risky Earnings: A Synthesis
Author(s) -
BOADWAY ROBIN,
SATO MOTOHIRO
Publication year - 2015
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/jpet.12120
Subject(s) - economics , earnings , redistribution (election) , ex ante , incentive , income tax , luck , optimal tax , social insurance , international taxation , labour economics , public economics , microeconomics , tax reform , macroeconomics , finance , market economy , philosophy , theology , politics , political science , law
We study optimal nonlinear income taxation when earnings can differ because of both ability and luck, so the income tax has both a redistributive role and an insurance role. A substantial literature on optimal redistribution in the absence of risk has evolved since Mirrlees's original contribution. The literature on the income tax as a social insurance device is more limited. It has largely assumed that households are ex ante identical so unequal earnings are due to risk alone. We provide a general treatment of the optimal income tax under risk when households differ in ability. We characterize optimal marginal tax rates and interpret them in terms of redistribution, insurance, and incentive effects. The case of ex ante identical households and the no‐risk case with heterogeneous abilities come out as special cases.