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On optimal income taxation with heterogeneous work preferences

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  • Ritva Tarkiainen
  • Matti Tuomala

Abstract

This paper considers the problem of optimal income taxation when individuals are assumed to differ with respect to their earnings potential and work preferences. A numerical method for solving this two‐dimensional problem has been developed. We assume an additive utility function, and utilitarian social objectives. Rather than solve the first order conditions associated with the problem, we directly compute the best tax function, which can be written in terms of a second order B‐spline function. Our findings show that marginal tax rates are higher than might be anticipated, and that very little bunching occurs at the optimum. Our simulation results show that the correlation between taste for work and productivity has a crucial role in determining the extent of redistribution in our model.

Suggested Citation

  • Ritva Tarkiainen & Matti Tuomala, 2007. "On optimal income taxation with heterogeneous work preferences," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(1), pages 35-46, March.
    • Handle: RePEc:bla:ijethy:v:3:y:2007:i:1:p:35-46
    DOI: 10.1111/j.1742-7363.2007.00045.x
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    Cited by:

    1. Weinzierl, Matthew, 2014. "The promise of positive optimal taxation: normative diversity and a role for equal sacrifice," Journal of Public Economics, Elsevier, vol. 118(C), pages 128-142.
    2. Golosov, Mikhail & Troshkin, Maxim & Tsyvinski, Aleh & Weinzierl, Matthew, 2013. "Preference heterogeneity and optimal capital income taxation," Journal of Public Economics, Elsevier, vol. 97(C), pages 160-175.
    3. Sanna Tenhunen & Matti Tuomala, 2010. "On Optimal Lifetime Redistribution Policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(1), pages 171-198, February.
    4. Lockwood, Benjamin B. & Weinzierl, Matthew, 2015. "De Gustibus non est Taxandum: Heterogeneity in preferences and optimal redistribution," Journal of Public Economics, Elsevier, vol. 124(C), pages 74-80.
    5. Terhi Ravaska & Sanna Tenhunen & Matti Tuomala, 2018. "On the optimal lifetime redistribution and social objectives: a multidimensional approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(3), pages 631-653, June.
    6. Carlier, Guillaume & Dupuis, Xavier & Rochet, Jean-Charles & Thanassoulis, John, 2024. "A general solution to the quasi linear screening problem," Journal of Mathematical Economics, Elsevier, vol. 114(C).
    7. Mikhail Golosov & Aleh Tsyvinsky & Matthew Weinzierl, 2010. "Preference Heterogeneity and Optimal Capital Taxation," STICERD - Public Economics Programme Discussion Papers 07, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    8. José Alves, 2018. "A DSGE Model to Evaluate the Macroeconomic Impacts of Taxation," Working Papers REM 2018/62, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    9. Terhi Ravaska & Sanna Tenhunen & Matti Tuomala, 2016. "On the optimal lifetime redistribution and equality of opportunities," Working Papers 1600, Tampere University, Faculty of Management and Business, Economics.
    10. Felix FitzRoy & Jim Jin, 2017. "Higher Tax for Top Earners," Journal of Economics, Springer, vol. 122(2), pages 121-136, October.
    11. Ruggero Paladini, 2014. "Da Bentham alla tassazione ottimale," Public Finance Research Papers 2, Istituto di Economia e Finanza, DSGE, Sapienza University of Rome.
    12. Peter Diamond & Johannes Spinnewijn, 2011. "Capital Income Taxes with Heterogeneous Discount Rates," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 52-76, November.
    13. Matti Tuomala & Sanna Tenhunen, 2013. "On the design of an optimal non-linear tax/pension system with habit formation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(3), pages 485-512, June.
    14. Hodler, Roland, 2008. "Leisure and redistribution," European Journal of Political Economy, Elsevier, vol. 24(2), pages 354-363, June.

    More about this item

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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