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Optimal Income Taxation with Uncertain Earnings: A Synthesis

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  • Robin Boadway
  • Motohiro Sato

Abstract

We study optimal nonlinear income taxation when earnings can differ because of both ability and luck, so the income tax has both a redistributive role and an insurance role. A substantial literature on optimal redistribution in the absence of uncertainty has evolved since Mirrlees’ original contribution. The literature on the income tax as a social insurance device is more limited. It has largely assumed that households are ex ante identical so unequal earnings are due to uncertainty alone. We provide a general treatment of the optimal income tax under uncertainty when households differ in ability. We characterize optimal marginal tax rates and interpret them in terms of redistribution, insurance and incentive effects. The case of ex ante identical households and the no-risk case with heterogeneous abilities come out as special cases.

Suggested Citation

  • Robin Boadway & Motohiro Sato, 2011. "Optimal Income Taxation with Uncertain Earnings: A Synthesis," CESifo Working Paper Series 3654, CESifo.
  • Handle: RePEc:ces:ceswps:_3654
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    References listed on IDEAS

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    Cited by:

    1. Dirk Schindler & Hongyan Yang, 2015. "Catalysts for social insurance: education subsidies versus physical capital taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(2), pages 274-310, April.
    2. 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.
    3. Hisahiro Naito, 2018. "Welfare-improving Consumption Tax in the Presence of Wage Tax under Idiosyncratic Returns from Investment and Incomplete Markets," Tsukuba Economics Working Papers 2018-002, Faculty of Humanities and Social Sciences, University of Tsukuba.
    4. Bach, Stefan & Corneo, Giacomo & Steiner, Viktor, 2012. "Optimal top marginal tax rates under income splitting for couples," European Economic Review, Elsevier, vol. 56(6), pages 1055-1069.
    5. Robin Boadway, 2011. "Viewpoint: Innovations in the theory and practice of redistribution policy," Canadian Journal of Economics, Canadian Economics Association, vol. 44(4), pages 1138-1183, November.

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    More about this item

    Keywords

    optimal income taxation; wage risk;

    JEL classification:

    • 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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