The “insurance effect” is introduced into the design of the optimal income tax policy when individual income is uncertain. One of the most noteworthy aspects of this analysis is that now it is even more difficult to derive analytically useful results for income tax policy purposes than it was in earlier analyses. Using numerical methods, it is shown that under quite reasonable assumptions regarding utility function and income distribution, we obtain a progressive marginal tax rate structure which is rather similar to the structures actually observed in many countries.
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- Optimal Degree of Progressivity under Income Uncertainty
- Palgrave Macmillan UK
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