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What Should Optimal Income Taxes Smooth?

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  • Torben M. Andersen
  • Robert R. Dogonowski

Abstract

According to the theory of tax smoothing, income tax rates should be kept constant so as to minimize the distortionary costs of taxation. By explicitly considering how labor supply is distorted by income taxes in a fully specified intertemporal model, we find that the optimal income tax policy should smoothen leisure. In the case of varying income (productivity changes) this is attained by a pro‐cyclical (progressive) tax rate.

Suggested Citation

  • Torben M. Andersen & Robert R. Dogonowski, 2004. "What Should Optimal Income Taxes Smooth?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(3), pages 491-507, August.
    • Handle: RePEc:bla:jpbect:v:6:y:2004:i:3:p:491-507
    DOI: 10.1111/j.1467-9779.2004.00176.x
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    References listed on IDEAS

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    Cited by:

    1. Abo-Zaid, Salem, 2012. "Optimal labor-income tax volatility with credit frictions," MPRA Paper 47612, University Library of Munich, Germany, revised 14 Jun 2013.
    2. Dimitris K. Christopoulos & John Loizides & Efthymios G. Tsionas, 2009. "Electoral Motives, Partisan Motives And Dynamic Optimality With Many Taxes: An International Investigation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 56(1), pages 94-113, February.
    3. Westerhout, Ed, 2018. "Paying for the Ageing Crisis : Who, How and When?," Other publications TiSEM 417903d2-6318-4744-891e-1, Tilburg University, School of Economics and Management.
    4. Westerhout, Ed, 2018. "Paying for the Ageing Crisis : Who, How and When?," Discussion Paper 2018-001, Tilburg University, Center for Economic Research.

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