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Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach

Author

Listed:
  • Kory Kroft

    (University of Toronto)

  • Kavan Kucko

    (BU - Boston University [Boston])

  • Etienne Lehmann

    (CRED - Centre de Recherche en Economie et Droit - Université Paris-Panthéon-Assas, TEPP - Théorie et évaluation des politiques publiques - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research, CESifo - Center for Economic Studies - Ifo Institute - CESifo GmbH)

  • Johannes Schmieder

    (BU - Boston University [Boston])

Abstract

We derive a sufficient statistics tax formula in a model that incorporates unemployment and endogenous wages to study the shape of the optimal income tax. Key sufficient statistics are the macro employment response to taxation, the micro and macro participation response to taxation, and the wage-moderating effect of tax progressivity. We empirically implement the tax formula by estimating the micro and macro elasticities using policy variation from the United States. Our results suggest that the optimal tax more closely resembles a negative income tax than an earned income tax credit relative to the case where unemployment and wage responses are ignored.

Suggested Citation

  • Kory Kroft & Kavan Kucko & Etienne Lehmann & Johannes Schmieder, 2020. "Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach," Post-Print hal-04966500, HAL.
    • Handle: RePEc:hal:journl:hal-04966500
    DOI: 10.1257/pol.20180033
    as

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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