DP15721 Optimal tax problems with multidimensional heterogeneity: A mechanism design approach

Author(s): Laurence Jacquet, Etienne Lehmann
Publication Date: January 2021
Keyword(s): allocation perturbation, mechanism design, multidimensional screening problems, optimal taxation
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15721

We propose a new method, that we call an allocation perturbation, to derive the optimal nonlinear income tax schedules with multidimensional individual characteristics on which taxes cannot be conditioned. It is well established that, when individuals differ in terms of preferences on top of their skills, optimal marginal tax rates can be negative. In contrast, we show that with heterogeneous behavioral responses and skills, one has optimal positive marginal tax rates, under utilitarian preferences and maximin.