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Optimal Taxation and Discrete Choice

Author

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  • Laurence Ales

    (Carnegie Mellon University)

  • Christopher Sleet

    (Carnegie Mellon University)

Abstract

In this paper we derive optimal tax equations for discrete choice economies with smooth underlying shock distributions and potentially unstructured choice sets. This approach expands the set of applications for which optimal tax equations are available, permits rich substitution patterns between choices, unifies existing results on income and commodity taxation and links optimal tax analysis to the large literature on estimating discrete choice models. The optimal tax equations that emerge highlight the role of semi-elasticities of choice probabilities to tax perturbations in shaping optimal taxes and, in particular, the implied willingness of agents to substitute from high to low taxed choices as a force dampening tax rates. We apply our approach to locational and hours choice settings.

Suggested Citation

  • Laurence Ales & Christopher Sleet, 2019. "Optimal Taxation and Discrete Choice," 2019 Meeting Papers 446, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:446
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