Premium
Optimal income taxation with a stationarity constraint in a dynamic stochastic economy
Author(s) -
Berliant Marcus,
Fujishima Shota
Publication year - 2017
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.12239
Subject(s) - economics , constraint (computer aided design) , tax rate , space (punctuation) , econometrics , type (biology) , income tax , microeconomics , argument (complex analysis) , mathematical economics , macroeconomics , mathematics , public economics , computer science , ecology , biochemistry , chemistry , geometry , biology , operating system
We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government cannot change the tax rule as uncertainty resolves. Due to such a stationarity constraint, our taxation problem is reduced to a static one over an expanded type space that incorporates type evolution. We strengthen the argument in the static model that the zero top marginal tax rate result is of little practical importance because it only applies to the top of the expanded type space. If the maximal type increases over time, the person with top ability in any period but the last has a positive marginal tax rate.