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Negative marginal tax rates and heterogeneity

Author

Listed:
  • Phillippe Choné

    (Institute for Fiscal Studies)

  • Guy Laroque

    (Institute for Fiscal Studies and Sciences Po, Paris and University College London)

Abstract

Heterogeneity is likely to be an important determinant of the shape of optimal tax schemes. This article addresses the issue in a model à la Mirrlees with a continuum of agents. The agents differ in their productivities and opportunity costs of work, but their labor supplies depend only on a unidimensional combination of their two characteristics. Conditions are given under which the standard result that marginal tax rates are everywhere non-negative holds. This is in particular the case when work opportunity costs are distributed independently of productivities. But one can also get negative marginal tax rates: economies where negative tax rates are optimal at the bottom of the income distribution are studied, and a numerical illustration is given, based on UK data.

Suggested Citation

  • Phillippe Choné & Guy Laroque, 2009. "Negative marginal tax rates and heterogeneity," IFS Working Papers W09/12, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:09/12
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    References listed on IDEAS

    as
    1. Choné, Philippe & Laroque, Guy, 2011. "Optimal taxation in the extensive model," Journal of Economic Theory, Elsevier, vol. 146(2), pages 425-453, March.
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    More about this item

    Keywords

    Optimal taxation; heterogeneity; welfare.;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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