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Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium
Author(s) -
Sachs Dominik,
Tsyvinski Aleh,
Werquin Nicolas
Publication year - 2020
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta14681
Subject(s) - economics , tax incidence , nonlinear system , tax basis , optimal tax , general equilibrium theory , income tax , international taxation , econometrics , microeconomics , mathematical economics , state income tax , tax reform , gross income , public economics , physics , quantum mechanics
We study the incidence of nonlinear labor income taxes in an economy with a continuum of endogenous wages. We derive in closed form the effects of reforming nonlinearly an arbitrary tax system, by showing that this problem can be formalized as an integral equation. Our tax incidence formulas are valid both when the underlying assignment of skills to tasks is fixed or endogenous. We show qualitatively and quantitatively that contrary to conventional wisdom, if the tax system is initially suboptimal and progressive, the general‐equilibrium “trickle‐down” forces may raise the benefits of increasing the marginal tax rates on high incomes. We finally derive a parsimonious characterization of optimal taxes.