Robustly Optimal Income Taxation
We study the design of a tax rule to redistribute income across heterogeneous workers optimally. The social planner faces uncertainty about the possible income choices available to each type of worker, and, therefore, cannot perfectly predict the income distribution induced by a given tax rule. In the face of this uncertainty, the planner maximizes her worst-case expected payoff. We show that using a progressive tax rule is optimal regardless of the planner’s preference for redistribution and that it is uniquely so under an additional richness assumption on the set of income choices that the social planner knows is available to workers. This result stands in contrast to the familiar zero-taxation-at-the-top result that arises generally (absent specific distributional assumptions) in the Bayesian optimal taxation model of Mirrlees (1971). To that extent, our robust approach to uncertainty about workers’ income possibilities provides a new foundation for progressive income taxation—-a feature that is prevalent in most existing tax systems—-that does not rely on parametric assumptions on the distribution of workers’ productivity, or on the social planner’s attitude toward income inequality.
Date: 8 November 2024, 14:15
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: Seminar Room G or https://zoom.us/j/93867615769?pwd=T1NsTEVwNE40R3pEVW9yTlBicG1mdz09
Speaker: Maren Vairo (The Wharton School of the University of Pennsylvania)
Organising department: Department of Economics
Part of: Nuffield Economic Theory Seminar
Booking required?: Not required
Audience: Members of the University only
Editor: Edward Clark