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- Title
The Simple Economics of Bunching: Optimal Taxation with Quasi-Linear Preferences.
- Authors
Boone, Jan; Bovenberg, Lans
- Abstract
This paper models unemployment as a binding nonnegativity constraint on hours worked in an optimal income tax problem with quasi-linear preferences. We show that bunching of workers resulting from this binding constraint provides a more convincing description of the bottom of the labor market than bunching due to violation of the second-order condition for individual optimization. Although a binding nonnegativity constraint destroys the closed form solution of optimal marginal tax rates, the optimal tax problem can be characterized in a two-dimensional diagram in which comparative statics can be performed in straightforward fashion.
- Subjects
UNEMPLOYMENT; INCOME tax; LABOR market; TAX rates; WAGE taxation
- Publication
Journal of Public Economic Theory, 2007, Vol 9, Issue 1, p89
- ISSN
1097-3923
- Publication type
Article
- DOI
10.1111/j.1467-9779.2007.00299.x