Optimal Income Taxation with Quasi-linear Preferences Revisited.
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Properties of the optimal income tax for quasi-linear in leisure
preferences are studied. With utilitarian or maxi-min objectives,
closed-form solutions are obtained. Bunching occurs over intervals where
the second-order incentive condition is binding. Whether this occurs
depends solely on the skill distribution. The patterns of consumption and
tax rates in the nonbunched range are independent of whether the
second-order incentive constraints are binding. Bunching at the bottom can
also occur if a non-negative constraint on incomes is binding for some
households. The pattern of marginal tax rates depends on the skill
distribution and whether it is truncated. Copyright 2000 by Blackwell Publishing Inc.
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