Full Citation

Title: Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach

Citation Type: Working Paper

Publication Year: 2019

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Abstract: We derive a sufficient statistics optimal income tax formula in a general model that incorporates unemployment and endogenous wages, to study the shape of the tax and transfer system at the bottom of the income distribution. Key sufficient statistics are the macro employment response to taxation, the micro and macro participation response to taxation and the wage-moderating effect of tax progressivity. We empirically implement the tax formula by estimating the micro and macro elasticities using policy variation from the U.S. tax and transfer system. Our results suggest that the optimal tax more closely resembles a Negative Income Tax than an Earned Income Tax Credit relative to the case where unemployment and wage responses are not taken into account.

Url: http://cred.u-paris2.fr/sites/default/files/working_papers/WP CRED 2019-12.pdf

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Authors: Kroft, Kory; Kucko, Kavan; Lehmann, Etienne; Schmieder, Johannes

Series Title: CRED Working Paper Series

Publication Number: 2019-12

Institution: University of Toronto, NBER

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Data Collections: IPUMS CPS

Topics: Labor Force and Occupational Structure

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