American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach
American Economic Journal: Economic Policy
vol. 12,
no. 1, February 2020
(pp. 254–92)
Abstract
We derive a sufficient statistics tax formula in a model that incorporates unemployment and endogenous wages to study the shape of the optimal income tax. 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 United States. 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 ignored.Citation
Kroft, Kory, Kavan Kucko, Etienne Lehmann, and Johannes Schmieder. 2020. "Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach." American Economic Journal: Economic Policy 12 (1): 254–92. DOI: 10.1257/pol.20180033Additional Materials
JEL Classification
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- 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
- J31 Wage Level and Structure; Wage Differentials