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Optimal Taxation with Multiple Incomes and Types

Author

Listed:
  • Spiritus, Kevin

    (Erasmus University Rotterdam)

  • Lehmann, Etienne

    (CRED, Université Panthéon Assas Paris 2)

  • Renes, Sander

    (Erasmus University Rotterdam)

  • Zoutman, Floris T.

    (Norwegian School of Economics)

Abstract
We analyze the optimal nonlinear income tax schedule when taxpayers earn multiple incomes and differ along many unobserved dimensions. We derive the necessary conditions for the government’s optimum using both a tax perturbation and a mechanism design approach, and show that both methods produce the same results. Our main contribution is to propose a numerical method to find the optimal tax schedule. Applied to the optimal taxation of couples, we find that optimal isotax curves are very close to linear and parallel. The slope of isotax curves is strongly affected by the relative tax-elasticity of male and female income. We make several additional contributions, including a test for Pareto efficiency and a condition on primitives that ensures the government’s necessary conditions are sufficient and the solution to the problem is unique.

Suggested Citation

  • Spiritus, Kevin & Lehmann, Etienne & Renes, Sander & Zoutman, Floris T., 2022. "Optimal Taxation with Multiple Incomes and Types," IZA Discussion Papers 15036, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp15036
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    References listed on IDEAS

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    Cited by:

    1. Jacquet, Laurence & Lehmann, Etienne, 2021. "How to Tax Different Incomes?," IZA Discussion Papers 14739, Institute of Labor Economics (IZA).
    2. Hellwig, Christian & Werquin, Nicolas, 2022. "A Fair Day's Pay for a Fair Day's Work: Optimal Tax Design as Redistributional Arbitrage," CEPR Discussion Papers 16863, C.E.P.R. Discussion Papers.
    3. Thomas Aronsson & Olof Johansson-Stenman & Ronald Wendner, 2024. "Charity, Status, and Optimal Taxation: Welfarist and Non-Welfarist Approaches," Journal of Political Economy Microeconomics, University of Chicago Press, vol. 2(4), pages 747-785.
    4. Bierbrauer, Felix & Boyer, Pierre & Peichl, Andreas & Weishaar, Daniel, 2023. "The taxation of couples," CEPR Discussion Papers 18138, C.E.P.R. Discussion Papers.
    5. Bernardo, Valeria & Fageda, Xavier & Teixidó, Jordi, 2024. "Flight ticket taxes in Europe: Environmental and economic impact," Transportation Research Part A: Policy and Practice, Elsevier, vol. 179(C).
    6. Kevin Spiritus, 2022. "Optimal Commodity Taxation Under Non-linear Income Taxation," Tinbergen Institute Discussion Papers 22-018/VI, Tinbergen Institute.
    7. Robin Boadway & Kevin Spiritus, 2021. "Optimal Taxation of Normal and Excess Returns to Risky Assets," Tinbergen Institute Discussion Papers 21-025/VI, Tinbergen Institute.
    8. Proost, Stef, 2024. "Looking for winning policies to address the climate issue in EU-aviation," Journal of Air Transport Management, Elsevier, vol. 115(C).
    9. Aart Gerritsen, 2024. "Optimal nonlinear taxation: a simpler approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(2), pages 486-510, April.

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    More about this item

    Keywords

    nonlinear optimal taxation; multidimensional screening; household income taxation;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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