American Economic Review: Vol. 100 No. 5 (December 2010)


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Negative Marginal Tax Rates and Heterogeneity

Article Citation

Choné, Philippe, and Guy Laroque. 2010. "Negative Marginal Tax Rates and Heterogeneity." American Economic Review, 100(5): 2532-47.

DOI: 10.1257/aer.100.5.2532


Heterogeneity is an important determinant of the shape of optimal tax schemes. This is shown here in a model à la Mirrlees. The agents differ in their productivities and opportunity costs of work, but their labor supplies depend only on a given unidimensional combination of these two characteristics. Conditions are provided under which marginal tax rates are everywhere nonnegative. This is the case when work opportunity costs are distributed independently of income. But one can also get negative marginal tax rates, in particular at the bottom of the income distribution. A numerical illustration is given, based on UK data. (JEL H21, H24, H31, J22)

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Choné, Philippe (INSEE-CREST, Malakoff)
Laroque, Guy (U College London and INSEE-CREST, Malakoff)

JEL Classifications

H21: Taxation and Subsidies: Efficiency; Optimal Taxation
H24: Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
H31: Fiscal Policies and Behavior of Economic Agents: Household
J22: Time Allocation and Labor Supply

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