SFB 303 Discussion Paper No. A - 66
Author: Ebert, Udo
Title: Properties of the Optimal Nonlinear Income Tax
Abstract: An essential of an optimal (nonlinear) income tax is its
implementability. Ebert (1986) presents an explicit example which
proves that the income tax derived in the framework of Mirrlees'
model (Mirrlees (1971,1976)) cannot be implemented. An
investigation reveals the reason for this phenomenon. Mirrlees adopts
the first-order approach in his formal model; i.e., only the necessary,
first-order conditions of the individuals utility maximization are taken
into account. Obviously this proceeding is not correct. It is not
sufficient to describe the individuals' behavior completely. If the
model is extended by the inclusion of the second-order conditions the
implementability of the optimal tax schedule can be guaranteed. The
second-order conditions require that gross income is a non-decreasing
function of ability n.
This paper considers the extended model (Ebert (1986)) and
investigates the properties of the optimal income tax schedule derived
in this framework. In order to obtain results the necessary conditions
of the solution to the planner's optimization problem are considered.
Most of the properties which have been derived in the original model
can be proved in the extended model, as well. Furthermore it can be
shown that the marginal rate of tax is strictly positive for all incomes,
but the lowest and highest income. Moreover we get some definite
results if bunching of individuals arises.
Keywords:
JEL-Classification-Number:
Creation-Date: December 1986
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