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Income Tax, Wage Tax, and Optimal Tax

Author

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  • Eitan Berglas

    (Tel-Aviv University and University of Rochester)

Abstract

Recent studies find wage subsidies (WS) to be superior to negative income tax (NIT). However, these studies suffer from a serious aggregation problem. A model is suggested in which these aggregation problems are avoided. In this model there exists a WS schedule that increases labor supply compared with an equally costly NIT. However, the WS may be Pareto inferior. Furthermore, for high income workers given any income tax system it is always possible to find a wage tax system which both is Pareto superior and increases labor supply. The merits of the model and its implications for other optimal income tax studies are critically discussed.

Suggested Citation

  • Eitan Berglas, 1976. "Income Tax, Wage Tax, and Optimal Tax," Public Finance Review, , vol. 4(1), pages 3-15, January.
    • Handle: RePEc:sae:pubfin:v:4:y:1976:i:1:p:3-15
    DOI: 10.1177/109114217600400101
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    References listed on IDEAS

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    1. Garfinkel, Irwin, 1973. "A Skeptical Note on "The Optimality" of Wage Subsidy Programs," American Economic Review, American Economic Association, vol. 63(3), pages 447-453, June.
    2. Browning, Edgar K, 1973. "Alternative Programs for Income Redistribution: The NIT and the NWT," American Economic Review, American Economic Association, vol. 63(1), pages 38-49, March.
    3. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
    4. Zeckhauser, Richard J, 1971. "Optimal Mechanisms for Income Transfer," American Economic Review, American Economic Association, vol. 61(3), pages 324-334, June.
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