The Department of Economics Macroeconomics Seminar Series presents
"Optimal Nonlinear Income Taxation with Multidimensional Types: The Case with Heterogeneous
with Etienne Lehmann, University of Paris II (Pantheon)
May 14, 2014
Social Science Plaza B, Room 3218
This talk develops a general method to solve the optimal nonlinear income tax model with one action (individual pre-tax income) and multidimensional unobserved characteristics. Individuals differ in terms of skills and belong to different groups. A group is a subset of individuals with the same vector of characteristics (e.g. the same labor supply elasticity) but distinct skill levels. Assuming the Spence-Mirrlees single-crossing condition (with respect to the level of skill) in each group, Lehmann first derives the optimal second-best allocation when the government observes income but neither skills nor the group. Lehmann then shows how this optimality condition leads to a tax formula in terms of behavioral responses, social welfare weights and income density in the vein of Saez (2001). However, multidimensional context implies that all these terms are averaged across individuals who earn the same income. Lehmann also shows how the method can be used to solve a large set of policy relevant problems for which it is crucial to introduce multidimensional heterogeneity, e.g., optimal taxation with heterogeneous elasticity, joint taxation of households, nonlinear pricing of a monopoly.
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