Scandinavian Working Papers in Business Administration

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2022/3: Optimal Taxation with Multiple Incomes and Types

Kevin Spiritus (), Etienne Lehmann (), Sander Renes () and Floris T. Zoutman ()
Additional contact information
Kevin Spiritus: Erasmus School of Economics, Erasmus University Rotterdam, Postal: Erasmus School of Economics, Erasmus University Rotterdam, Burgemeester Oudlaan 50, 3062 PA Rotterdam, The Netherlands
Etienne Lehmann: Université Panthéon-Assas Paris II, CRED, Postal: CRED, Université Panthéon-Assas Paris II, 12 Place du Panthéon, 75 234 Paris Cedex 05, France
Sander Renes: Dept. of Business Economics, Erasmus University Rotterdam, Postal: Erasmus University Rotterdam, Department of Business Economics, P.O. box 1738, 3000 DR Rotterdam, The Netherlands
Floris T. Zoutman: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway

Abstract: We analyze the optimal nonlinear income tax schedule when taxpayers earn multiple in comes and differ along many unobserved dimensions. We derive the necessary conditions for the government’s optimum using both a tax perturbation and a mechanism design approach, and show that both methods produce the same results. Our main contribution is to propose a numerical method to find the optimal tax schedule. Applied to the optimal taxation of couples, we find that optimal isotax curves are very close to linear and parallel. The slope of isotax curves is strongly affected by the relative tax-elasticity of male and female income. We make several additional contributions, including a test for Pareto efficiency and a condition on primitives that ensures the government’s necessary conditions are sufficient and the solution to the problem is unique.

Keywords: Nonlinear Optimal Taxation; Multidimensional Screening; Household Income Taxation

JEL-codes: D82; H21; H23; H24

Language: English

54 pages, January 24, 2022

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