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Using A Microeconometric Model Of Household Labour Supply To Design Optimal Income Taxes

Date Added: Oct 2010
Format: PDF

The purpose of this paper is to present an exercise where the authors identify optimal income tax rules according to various social welfare criteria, keeping fixed the total net tax revenue. Empirical applications of optimal taxation theory have typically adopted analytical expressions for the optimal taxes and then imputed numerical values to their parameters by using "Calibration" procedures or previous econometric estimates. Besides the restrictiveness of the assumptions needed to obtain analytical solutions to the optimal taxation problem, a shortcoming of that procedure is the possible inconsistency between the theoretical assumptions and the assumptions implicit in the empirical evidence. In this paper they follow a different procedure, based on a computational approach to the optimal taxation problem.