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Using a Microeconometric Model of Household Labour Supply to Design Optimal Income Taxes *
Author(s) -
Aaberge Rolf,
Colombino Ugo
Publication year - 2013
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12015
Subject(s) - economics , econometrics , social welfare function , budget constraint , labour supply , constraint (computer aided design) , welfare , norwegian , optimal tax , function (biology) , microeconomics , mathematics , linguistics , philosophy , geometry , market economy , evolutionary biology , biology
With regards to empirical applications of optimal taxation theory, analytical expressions are typically adopted for optimal taxes, and then numerical values are imputed to their parameters by calibration or by using previous estimates. We aim to avoid the restrictive assumptions and possible inconsistencies of this approach. In contrast, we identify optimal taxes by iteratively running a microeconometric model, based on 1994 Norwegian data, until a given social welfare function is maximized, given the public budget constraint. The optimal rules envisage monotonically increasing marginal rates (negative on very low incomes) and – compared to the current rule – a lower average rate, lower marginal rates on low incomes, and higher marginal rates on very high incomes.