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Tax Curvature

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  • Albert Jan Hummel

Abstract

In a Mirrleesian environment, a monopsonist sets hourly wages and individuals choose how many hours to work. Labor market outcomes do not only depend on the level and slope of the income tax function, but also on its curvature. A more concave tax schedule raises the elasticity of labor supply, which boosts wages. Consequently, optimal marginal tax rates for low-skilled workers are declining in income. I derive an optimal tax formula in terms of sufficient statistics that accounts for the impact of tax curvature on labor market outcomes.

Suggested Citation

  • Albert Jan Hummel, 2021. "Tax Curvature," CESifo Working Paper Series 9220, CESifo.
    • Handle: RePEc:ces:ceswps:_9220
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    References listed on IDEAS

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    More about this item

    Keywords

    monopsony; optimal taxation; tax curvature;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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