Pareto Efficient Income Taxation with Stochastic Abilities
51 Pages Posted: 27 Nov 2003 Last revised: 25 Feb 2022
Date Written: November 2003
Abstract
This paper studies Pareto efficient income taxation in an economy with infinitely-lived individuals whose income generating abilities evolve according to a two-state Markov process. The study yields two main results. First, when individuals are risk neutral, the fraction of individuals who face a positive marginal income tax rate is always positive but converges to zero. Moreover, the tax rate these individuals face also goes to zero. Second, Pareto efficient income tax systems can be time-consistent even when the degree of correlation in ability types is large.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Preference Heterogeneity and Optimal Capital Income Taxation
By Mikhail Golosov, Maxim Troshkin, ...
-
Optimal Taxation of Entrepreneurial Capital with Private Information
-
Optimal Taxation of Entrepreneurial Capital with Private Information
-
Designing Optimal Disability Insurance: A Case for Asset Testing
By Mikhail Golosov and Aleh Tsyvinski
-
Optimal Taxation with Endogenous Insurance Markets
By Mikhail Golosov and Aleh Tsyvinski
-
Inequality, Social Discounting, and Estate Taxation
By Emmanuel Farhi and Iván Werning
-
Inequality, Social Discounting and Estate Taxation
By Emmanuel Farhi and Iván Werning
-
Dynamic Mechanism Design with Hidden Income and Hidden Actions: Technical Appendix
-
Dynamic Contracting with Persistent Shocks
By Yuzhe Zhang