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Social insurance and the optimum piecewise linear income tax

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  • Strawczynski, Michel

Abstract

This paper calculates optimal linear income taxes when differences in income are caused by random factors ('luck') rather than by unobserved individual abilities, as assumed in the classical theory of income taxation. As first shown by Varian (1980), in the former case income taxation acts as social insurance. By introducing life uncertainty and precautionary behavior, we find higher optimal marginal tax rates than those found by Varian. We also find that ­ in the context of a piecewise two­bracket linear tax schedule ­ the second marginal tax is always higher than the first, and equals 100 percent. This last finding contrasts with results recently obtained in the framework of classical income taxation theory, which show a lower second marginal tax. For the parameters used in the simulation, we find that a Rawlsian social planner chooses a higher first marginal tax rate than a utilitarian planner would.
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  • Strawczynski, Michel, 1998. "Social insurance and the optimum piecewise linear income tax," Journal of Public Economics, Elsevier, vol. 69(3), pages 371-388, September.
    • Handle: RePEc:eee:pubeco:v:69:y:1998:i:3:p:371-388
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    1. Slemrod, Joel & Yitzhaki, Shlomo & Mayshar, Joram & Lundholm, Michael, 1994. "The optimal two-bracket linear income tax," Journal of Public Economics, Elsevier, vol. 53(2), pages 269-290, February.
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    Cited by:

    1. Thomas J. Kniesner & James P. Ziliak, 2002. "Tax Reform and Automatic Stabilization," American Economic Review, American Economic Association, vol. 92(3), pages 590-612, June.
    2. Satya P. Das, "undated". "North-South Trade, Capital Accumulation and Personal Distribution of Wealth and Income," EPRU Working Paper Series 99-16, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    3. Johann K. Brunner, 2003. "Optimale direkte und indirekte Steuern bei unterschiedlicher Anfangsausstattung," Economics working papers 2003-10, Department of Economics, Johannes Kepler University Linz, Austria.
    4. Lundholm, Michael, 1999. "Comments on Social Insurance and the Optimum Piecewise Linear Income Tax," Research Papers in Economics 1999:8, Stockholm University, Department of Economics.
    5. Low, Hamish & Maldoom, Daniel, 2004. "Optimal taxation, prudence and risk-sharing," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 443-464, March.
    6. Sanjit Dhami & Ali Al‐Nowaihi, 2006. "A Simple Model Of Optimal Tax Systems: Taxation, Measurement And Uncertainty," Manchester School, University of Manchester, vol. 74(6), pages 645-669, December.
    7. Hsu, Minchung & Yang, C.C., 2013. "Optimal linear and two-bracket income taxes with idiosyncratic earnings risk," Journal of Public Economics, Elsevier, vol. 105(C), pages 58-71.
    8. James P. Ziliak & Thomas J. Kniesner, 2005. "The Effect of Income Taxation on Consumption and Labor Supply," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 769-796, October.
    9. Alari Paulus, 2016. "The antipoverty performance of universal and means-tested benefits with costly take-up," ImPRovE Working Papers 16/12, Herman Deleeck Centre for Social Policy, University of Antwerp.
    10. Stefan Homburg, 2001. "The Optimal Income Tax: Restatement and Extensions," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(4), pages 363-395, November.

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