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Optimal income taxation with a stationarity constraint in a dynamic stochastic economy

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  • Berliant, Marcus
  • Fujishima, Shota

Abstract

We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government cannot change the tax rule as uncertainty resolves. Due to such a stationarity constraint, our taxation problem is reduced to a static one over an expanded type space that incorporates type evolution. We strengthen the argument in the static model that the zero top marginal tax rate result is of little practical importance because it only applies to the top of the expanded type space. If the maximal type increases over time, the person with top ability in any period but the last has a positive marginal tax rate.

Suggested Citation

  • Berliant, Marcus & Fujishima, Shota, 2016. "Optimal income taxation with a stationarity constraint in a dynamic stochastic economy," MPRA Paper 74194, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:74194
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    1. Takao Kataoka & Yoshihiro Takamatsu, 2024. "Optimal labor income taxation and asset distribution in an economy with no insurance market and extensive labor supply responses," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(6), pages 1611-1639, December.

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    More about this item

    Keywords

    Optimal income taxation; New dynamic public finance;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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