PART IL OPTIMAL TAXATION £‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, ‘Optimal Income Taxation # ‘This caper teas with 4 description of the optimal income tation problem as geen Jorated in Ue erature and hen presents the main ests and simulations bth fr the sped canes of s Heer tree trans two Aechet income tax and fo the pera cae ‘ontnet income tax Ass converions the model considered wil ise wee pero eng |nwhich indedual oly choc warble th dagre of bor fort. thees snl compsie ‘conmupton god, aod povernent expends on pubic ode are aan a given. Macho the ‘umainderoftisbook considers how tbe analyse hangs when avai oferensing remade ‘Altough the pesenation in thi chapter age andar, some of the elements examined, “pec earn certain uaifations, have et fen bes adresed ad maya be wiely {A statement of the Froblem he nds ny igen by Pane dene contin dene Ibo fr, > tan <0, where ectesps denote eae with pet the ete epee An Indivuntsconaumption seventy, c= wl-Thwi), (an shee wi tenia wage ate and th tax rants nction aly sefereto pty ax function sched Eachof te component deere rte abortion ‘Themothationforedstibtvtantion that india fer npr inher wees hat the earings The dsributon of sie is noted Fw, with deny fw), the population being normale to havea total mass of one In sundae formulations ofthe ima ico ta problem die ies rnd yt en wage ieee 2 ‘eeangenous Their pre-tax earnings ae the product oftheir wage and ewe of abr effet. More wendy, on can interpret eft snug no only hour of work bt als ftesy, and nat sey pocucie eft br ao eres naman xia “axes and waters. dt any income ee may be postive or negate a epee in ge 4.1. The tm gfe othe grt receiedbyaninviual earing no income, hat PO), reflecting that he ta schedule staan to represent the entre taxvanter system, Tse may Ince let oF VT payments inadon once anes Tranter include ov tough ‘het tem ach ache Larne income Tex re inthe United Sse) elle poem oct chapter) and unde some interpretations, publi gods ee chaper 8)‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, Toot) ‘owes and tances ar taken toe 4 function of ivi’ incomes, ature 9 be bral and ite this dependence of tes on income that the sure of ito. tases ‘euldnstead depend det om ini’ bites nivale lamp-sum aes would ‘we fea and restbuton could be accompli witout dtetng ike supp. AE, ower sasumedtobeunabsermable or further dcusion se subsection 1) Individuals choo the lew flor eft! hat maximises oe) subject othe get conse, exresion 1) An indus ested connie wT w))u, +m, " (4.2) whores prime denotes the dere with respec toc ni argment—in thi ese ‘nPindeatng te marginal taxrateofenindvidal earning income of These tem tenobethehit at sranfershle eh omaince secon ch pia ng esa anne Jw CoGontt) fod, (43) winrcndareach exp enon ofwtonfera tne oeoumpsn sean Labret coven by annual ope abit w- This malate suet arene onsrain ano oneal repring individual behavior. The former Jroaonrside= a) ce ye tenet tee Sigoanseepam esas meartseaoneto aguas ees eee reentrant inter peer peor es rer st enone eras Brig nirotarsereimenmmdnseraimenarira swniarea “cotati ak cis cn sees cua eee irae oeeet aenanenrmenacuemated acesencnacacecssm menor Seon eemeeae SSS potest crime errant ary seo mama‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, abo for wi frre) vidual behavioral responses ae therfore eat onto this Sales eearing revenue! 1 Brow tobe robematic to anrume tht beirut decribed yaa Sestnder conditions because of mali epima, which in turn ean peduce disesilie in ‘havo although his pole siete in sone othe moc techie iterate cn epi ‘came tsaion eon igoeed a practice Ae wll ese, owe, the implision ‘canbe pectic when extining how lnividee sj bor ep beet nonctove te tense shel thatean gies o mule opti aro neret or amples portant to determine whether magia ater on lowwrincome individuals shoud fll afr income suaantes are gue phased out ha at hgh marginal rat) or whether maria ates shoul be faling fo very highincome inva, which ome anlyes and smultons up ‘may be optimal: Dacotnuties canal are wih repardtothe decion whether sup ar abo atal he partptiondesso, or extensive mari) suchas inthe presence of fled os tring B Results Despite Meee (1971) leat formation and ara and subsequent work on the subj, ‘the optimal neame taxation problem retin formidable! Acordingy no emt ie made ere replete exiting formal erations ot extend them Intend steno frase ot ‘stclting the main ols and hittin bith —eich wil cent appacie "ot of what follows in ater hapterrand presenting some simlasens fom the Uterature ‘hl scion bps wh he sper nes ier ince aad ae bac ex and hh Tow) “a ites un mae ae Altearincome xis defied by Tow) =twl-g, (4s) whee he constant, income independent magi tx rte nd gis he uniform perp (panto descibedin caper 2 susion oft a Se igure 2 ‘The governments wale maximintion problem canbe writen in Lapranglan form at‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, JUV GC-omton+ gst00)))+ AGore)—g—RY]fowddw, 4.6) where the hadon price of even firing othe constrain (44), an (Saab nto (1) 9 hat consumption expressed i ems of the specie linear tax stem under ceonsidention ‘Thai ondr conto forthe optimal axatcn fly beers at £___cov(aw).y() ‘yow)e(w) fw dw" (47) It waco)» wl), nome earn by nv of bey ws) ithe compensa lacy fle for finials fay wand a) the et sal marginal vation of income, ‘fated in dlls of nvidia of aby 2 The ater vation en by Wate) aw) oe (48) ‘The numerator of the fest term on the ght se of 4.8) ndetes how much atonal Cump- sm) ncome oa nda aby w conta to socal wears ical ow Ach uly ss per dala ofconsunpion and W indicates theextent to whichsedalwelarelnceases ‘et unit of wlan thi i converted to a dlr value by dividing bythe shadow pre of Jsvenment een The second em abe into acount the nore eect, name tat NE ‘sdeional ump rim income tan inal fay w il mace labore (a4) whlch ntur reduce government ax callstonsby wer uit eduction ‘xptsion (4.7) indicates how various factor aft the optinal lev of nea income a sepnning with he rarer higher in mage) covaance beeen andy ft AM taxrate The nt marginal soil valuation of incre, of), wl be falling with cine under ‘teumptioncntinarily porated) Woe tat inthe presen tingle covrace eet not refer na oe (negate) soliton, which aye snared Be presen, Du her {0 1 Nigh dinpenion tndarédeviaion) of @ and of». The dispersion of wil tend t be eter the more concave egalitarian) the wear fanton W andthe more cence tty 2 fancion of consumption tt ig the eater the rat t which marginal ity fle with Income acme, lhave higher spin (gain, der saad assumtions) whe tbe sibaton of undeting abies is move unequal n sum, move ealtaian ei references, ‘Deter evita aversion tian bigheruneryng inequality wallets ton higher imax "The denamnstr onthe right ide of (47 inate has hgher compensated abr spy lacy Evers lower tex te. wl be nated thatthe ether term inthe etgrand an hat, eur paribus the labor supply sty matters more with ead high income inviduals tnd ata levels where tere ae mere individual (cyl the mia ef the incre sibacon, bees of he greater sacrifice in revenue. Mote farther haf ths compensa tlatichy i taken to be constant, the denominator i sip) the lat weighted by aeeage Abhough the froin dtu addres ach ofthe terms in (47), complete, fay ie werth emphasing tht icome eet (an tas deviations Recon comport nd uncompensted elaticties of labor supply) ae inirety lev, 2they infonce the fale of ough the second ter i (48) and sb croup shadow pice He see note 11 ‘Whether hs fect increase or edues the covariance term in (47) not a pod obvious sd exring sistsions do nt explore thie dec Second, the vale on the ig side of‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, (4:-tneudng those presnt via @8)—ar endogenous Thus fone performs the optimlation ‘with aya diferent bor uplyelaticty—implcily, dierent wiity fancion—tentialy “cejthaecep/(0 charges aca the shadow prea he povernest eet ons ‘coding is teachers to make conient statements eating the eft of hanging oe ‘oc aother parameter without mae elaborate anal siustions. The Mera as age es) ‘The mort pote pial linear nce tation simatons ae thos of Sten (1976) Fat ‘his prefere ase—an atic of btn of 04 a goverment even eee of 20% cf maional income, and ola aia vakation of income that dcenes oughly wih ‘the sue of income! nds hat the optimal tax rate i 34% and that individ’ amp sum pan equals 30% of erage income (These estimates refer tothe combination of al ne {ll goverment expenicres eal etition are ced by thls tx) Te hse the bones of eaten scheme tht wes ower tax rtf igh enough to Sance _mverment expenditures on goods nd services hats, wth gant of), produces lel of seca welfare thats ery an amoun equivalent 9 approximately Sot mana incame! ‘A inortant benef of Ste cleultns is thatthe nate senso the opal ina income tax ate to ey aerupons it, te optimal tax rate depends onthe welie bene anocited with equity Aa note his central estate arumes that the sei mail ‘hatin of Income decresas rough withthe agua of nce. A expan abaetion 5183, cuch an erampson nigh be atonaned by eidence nde arial ty ef Income dminishesat thst orby an assumption hat marginal uty mises tor sowy Win (we) Wi. () ford aq (1-fov wa ‘utara formation). To suggest the sensitivity tts assumption he calculates that there {evenly oo weight on gusty the optimal tax ate irony 25% and hati there eae ‘wight on gut specie the mainte, the optimal as ate 57 ‘cond Sernexplres tensile supply sumptions In iscenralene,anestemaly low catty mpesanoptimal areteot 79%, nan cast ashighashadbeenandinomne caer etre tmple sm cpa tases of 536 “hese central enimat serum tat nonredsitv) goverament expends se sppoximately 20% of national income In the absence ofthe ned to fnnee such expendture {he optimal exec 4%, and expend re wie a igh the opal tax rt I ON ‘Theintton that fora ven arta greater even requirement imple smal gt ence a that ox ate, thre wl be mor variation in the marital scl valuation (48, which (aro higher tax te acoring 04722 2.300 batt nome Pax ‘Teo brace income tat has ese ome tetonbecsie atl nome ak eet not tobelinea bt thy alu oot have smoot varyingrate or an exceeding lg ibe ct taxbracets Aionallyatwo-brachetncometaxiseasert analyze than anole, eit sndanothercnstant tt; oallincone over the pied level Thetatschedue an cxarple {nashing the simulations blow) of which depicted neue 3, therfore tht ace shoud pace do wight meget hag mere weight iy‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, twig, wis y' (49) ty +t,(wl— y")—g, wh> y* ‘er te preroent choosy fy" andere masini ci i. ‘hi probem cele by Slemrod oka, Maya, nd Landa (194)! They report simulation foraneptinaltwbaceticome tuning functional rns and parameter sar to thos empojed by Str (1976 and others nl ofthe case they conde, the opin ‘pper-cht maria tax fate les tha the opin lover brace ate, Neverthe, i sustins in which the optima anf i postive, the ove income ax shel ogres, defined a exhibiting ring average ax rates. n the snlation cow t Sent ‘enact opal incr ncometax has ate 8, whereas th optima two bch a ‘ae marinl rate of 0% on low incomerandS2%on high incomes. s Tew) -* ‘The iution behind th resus shat the lowe tate on high ncome nul induces sterol and thus raiser more venue witout having to crc event on nora ‘bjt to the owerracet ate This lows «leer att be nance Pet another ey ‘abirgthe boom rate, whe teepngthe op ate ed niamarpnl earn oper trachet Indu enact 8,7 fom them witho totng hr abr spp ned hae ae mince fect on upper races indvul tht farther creses thei abr spl and hat ‘nreatin the scl preference or quit nce roomy do the tox ats and et sa peter pefernce fer equality mest opti fr the maga tax rat ow income invidunt to be frter above the maria ate on highincome individuals. Te tution is ‘tvetly ta at noted: Allowing the fit ob igher eben atonal eve to Be rated fom highncomeinvidualtofunda higher wane. and his intense ing relaly rmorevalualethe rater isthe sei ene rom esrbaton, Senso al (1998) alo explore the efecto socal wellere of blag ale 0 we «te bracket tx rather than beng confined ta linear a. nth simulations, the rests beet it quale 190.2% of atonal income, whet owe ales oly 0.002% af atonal ncme ‘Aalnshis benef one weld compare the administrative costs iad in wing a two-bracket rather thin a single racket sytem, which thy suggest would be smaller than th ighest ‘tinateofenets bt would exceed their lowet etna of benefit Anas Returning othe more general formulation fhe optimal income tation clon erie in section AG figure 4.1, the poverment chooses tax sched Td to maiise he sei wee Faction (3) subject te a eer contn (4) and constraint eins‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, ‘hat indians fal by eels be maxing tel wily 4.2 taking te tx seed a Des (1971) and many sabeeqentiveigatcs empl contralto techni t2 séveasthispobem In this formation the government might be posited to choos labor eo “sty (or perhaps income apa consupton foreach ait iypew which ena he ce sf atwetinctian (ora ghen aby pci abr fr) wil el icome of i) a fnecathen uch ty function to identy what ater trinsic fom that income let produce the specifi ee of wtity ob aehewed yan nd f ably) his ‘usmizto, the contain reprting indus masmisng behavior aretha onda ‘fay yew wil preter the ce peed for any ober type wT als canbe Wasa Jato he version ofthe pate describ in secion A. When an iil of sty choos ‘w)tomasiniz wy whieh pedo the gies xsd, we can eeu he nds ‘otehooing some other let of aor fr andths achevng ome thr lence ich ‘ter els eng opina foe types of individuals instance, somewhat wer ty Indl would tndtoend up ats samewhst lovee fncome). ‘Thianabla cane summa in afi onder conn forthe pial maria incom ta ‘ateatany incre level where wand correspond tothe abity level and degre abor et ‘upped bythe typeof individual who woul xm 7 Rallowing reseraions ears, mae {he plying annum that wit eeprable etwen consumption and lao flr and stearate nel bow at meet coat nih eee ( - Wee ) ow 1= Fw Tow") 1-Tw'h) oo Erw fw") where = 1/01Pug/)—which, when ui Ie quan a assured here, equals 0 shee ithe lati flabor ply. (Tire ifn statdta beth compenated atic bat seth quasinee pretences tees no fname efecto the competed a uncom pee ‘latices aeidenticl) Note that thi formation nlaes 1 win both the mums {he denominatr onthe ight i, The roan hain he a en (7/0 priya propery ofthe ditribon ow, and nthe second term, bese theme Invgral fom w'tom, thet ava we eran average vale for he expression in bracket ‘helnapand Boh ages cate inert, as willbe sen inthe diamine Tarif in understanding expesion 4.10) is ep tohavein inthe spe pertbation tb income tax wchedle hat unde th rt order condton. one ens wih wre tax ‘hele 7, assumed to be optima t must be that no ight agusimen to the cede wi ‘change the vel of sca wale. peal expression 4.10) Based onan ate hat ‘gy alas ee aria crate he income eel (yal nev fom 3" + 8 eng ll other magia tax rates unl Thee ae wo efecsfsch change Ft, Invi at that incre lev face higher marginal rate, which wil ditor thee be effet, ‘oa Second ndvduals above income vel wil ay more tx bu these india face ‘0 mail tortion. Tat, the higher marginal ate afar o he, Since {hose ging income are sn aove average ace the population eather fh putin eh icome above 0). there tend tobe areata Expression (610)can ready beinereted interns of his perturbation 2 Bein with he fist term, Revers collated fom lla with nces shove which it sry al lng \ypesabove whence the FW) ia the numerator One distorts nthe behav the magia ‘yp whichespiiathe vin the denominator hearer the ation ofthe poelten paying ‘more ax and thelr the outing terete put mere compat he rater eran of he formar othe ater—the hight the optimal tak rate. The denominator aso comtalns eight of nieating he extent of the labor napa sepone, nd Winding how much ign te finan thus revenue sos per un of eduction in abr eo.THE THEORY OF TAXATION ‘The sod erm ples scl woghing to the revenue tha salted. Te expression in eats ip the integrand in the numerator the difernce between the ginal dalla htt {© paying moce ax Ain the interpretation of 8, athe marginal ty of onnumptin > ‘ch india, Wines the impact of changes nity on ecw, ad vision by Inmepl at peiousty noted, sie by 1 Rw) to convert to an average forthe fected option, ach teton has bees voted condering how thee factors bea just onthe overall sev of tx ates but onthe shape ofthe tax schedule, eared, whether opal magia ax ‘ates rie or fal with income in diferent range ofthe income dtutin. The ate tein ‘expresin (410) tends oar Fig ates The rater iw the ower une he were ‘uncon utara, n which cae this is constan and fw hd nat forthe moment ss ‘qsetiner preference, the ewer would be the marginal wit of consumption hence at ger oe weg va ofthe erm subtracted nthe negra smal, making the ee texans Notre tha ifsc welfare ort seasonal oncve, Wi wlappreach ‘aro at hips incoe, at whic ol his term il be ery constant in 2 That ithe teem foe ng marpnaltaxats when incomes lw omer bat tha effec ote ‘pate of marginal rats near te top ofthe nome tution! ‘The fst em as move complied effets: The numerator fal with nce which foes sceaing marginal arena Sense there feeds nha face theinfaarginl lon provide even oredistbute as one moves pin the cone dsb, ts core beet cE hgher marginal eater ling In the etree, there ea Known Nght ype nthe ‘neo ation, the pial marginal eon the highen ering indivi weld be ero ‘cnse 1 Foul be eo: ARigher tcl no een but drt the Bhavar ofthe top individual Howeve when theres ighes type own withcertany in advance hire ‘sinapbeable Furthermore een with known highest pe simulations suet 2. |AND PUBLIC ECONOMICS 1 god approximation of the optimal marginal taxa even quite oe tothe top ofthe Income \Sstibaton othe eo rate at the topes icf ite praccal consequence. 1 the denominator, the data term, C9 ually taken to be conta Hower mii evdece (0 bsctin 542) suggests tha he print behavior high incre ‘nda may besbstanialy mores which woul ling maria arate. The” component the denominator deny favoring the reason hat the change te marina tye behavior ne hs thet even los me ipertnt the higher tha pet rut. Pally the iw component has varying fects nets tht te extent of the ‘Gxterton proportional ithe mane fides who fac the higher ate at the magi For diary posted datos o sil, wile ring ow nome lee and fang a eer income levels. The former as yet another reason for marginale toe aling a ow incre level bt heater provides easn or marginal ates tobe isn ater the mode fe incre ‘nibaon. whether thei erm at whe fever ing fling rte ae tapas ben ‘bjt putea lle explore erin ceportng thereat dinlton. 1 cuttin. There ae muber of caveats concerning the iteration ofthe st der contin 10) nial. conser the expression’ lance on the fed asupton a {un linear feces, under wich econstant The primary motivate oti aseumtin 1s eat the optimal nonlinear income tx problem is move anltcaly wactable when incre sect ethene Sefer he arth jtieaton that mpl evidence sige hat icome fects on abr supply are small Nevertheless, ecesve rus en gus teafewnce is pctlentic Epinal wok oes net cy rule ou the sigue cf incre ets Asin smear estimates are accompanied say smallesimate the compensitel ast of hbo suply soe theater snes importain opal income tax analy come es canot be sumed io hve nly econ oder enortanc. Indeed, ome blew that income fers exceed substation ees n wich case ignoring te former fee sitting sgnicane to the ater oud be gute misening = Fustheroe oult‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, ‘bw emphasar that wait being nonlinear in consumption not only important on scout of sneame ees but te for menrsng the socal wale nga feat, parent ‘hom the er in expeesons (4.10) and (8). As chapter 3 dscue, conc of wy 6 sub anarportan sare feta rere, 0 garni mal et bok nalyisispelemate This iespecily sin setingsin which attain en) sok were -Aecontingy flowing Atkinson ad Sight (1980) and sme ether, we can conir version ‘tthefistoder condition ht doesnot assume tobe constant se W'(uiw))u,(w) Cw) a vnwy £ ) ee ) Ewe fw") Tow) Tw’ Flow") any -s writen the only ferences betwen expresions (411 and (410) concern the integrand in ‘the eco em (Atcnaly ts nolnge trae tat py eels) theater te, | are partes, we an ow Se tht diminishing meal tity to consumo Indeed ‘ce the nial wept on higher aby types who pay te taxing which ent ver ‘higher marginal tax tes Furthermore the ene premheticalexession nthe Iter & weighted by udu), the rai ofthe marginal tity of the type facing the Iypathesod ‘magia! ate incase to the marital tly of the higher types for wham the lncrease namarpna Thier ising in, 2 ven genta wight in the integral laced on te igh types fr whom the term in pe preachers so uspeig We opimabty ct higher arial ate, etapa Net, howe, tha he pst he el df ‘Be reatiey ere fr lw wand relates for igh w. When wi ow, 7 sarge hashav «lower marginal uty consumption) However, when ichigh 3 slow nt ‘marginal tty each ater 2 vent ther igh lev of hao wl Decoriparaely salle would appa. bere, tha aking cng maria! wy of consumoton to count intact that fr fing marginal tates Howes the completo he Inert fetes nthe irerand combined with heft hat ha dierent ierpretation when income ft re sllowed vender any mich section pobemtic and may ale ey 69 ‘plain wy moet ofthe lnerture des not rain ths portance in any dpe 2” ‘ether important reservation gudingtbeinerretation fhe frst ode condans (4.10) snd (4.31 that, with (47) fr the near income ta ost of he components onthe ght ‘ide ar endogenous; ar the pole seven more compen becouse the it ie pity pends om marginal ax ates othe than a notably, hugh the erm W/A. Ths when one contemplates the eet on the optimum st. changing the elastic of no uy one mpi ichanging ober terms both etc one ee ieee iy ancien 69 fpenemten diferent ccc, and diferent ty function have cther lcs and nici (becuse deena fle ote optimal maria tx ites andthe elie lev consumption and ofthe shadow pice, which nt wil aft the epi main axa eto ‘ompaunding these ticuties, thas performing slain sorties make adtonal sjustments fr example by changing additonal terms inthe wy function 0 tht he erp of the sulin n terms of average abr effet o he dtibutin of income dey matches 2 tage dnwn fom data on the exiting sytem 2 Hence when &partclreoneguenc ic sown to flow trom a ven parameter chan, the stated change ten in sation (ts pars) may hae the nt lcs presale fc or even the opp the litrncebengeplne by the ther ajstment at hve ben made. Ths even the modest ‘understanding tha hi ben acleed trough the examination of icordr condone and ety nays insets is aiid aeincmplete one ‘nd for much higher wil be subcantlly ee. (iigher bry Pe consume MARE ADA cz «ws‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, 1 soul lobe empha thatthe east of table income appears to ier ray ‘snongtaxpsver, beg a bigher for high income idvada and thei scrapes hat Porte peter opportune for maipuningtnable come for xa, Grube See (2002) estimate of 0 is driven primarily by 2 057 eat fr how with incomes ver #200000 an een higher forthe subse who erie cecucton); he elastic es than {hie ae high for owenincome indus Mafeand Wil (200) rat he vey eh ‘onbte ety to thigh sty estimate, and Alm nd Wallace (2000) oper sia rel tbat he dfernce othe wry having geste contol ove nail ater, ‘pec he form f compensation ee ao Gert 2006) Auten nd Cal (199) etme for "vesosl 237, fr farmers and the lf ployed, 1.12, ado enue and manage, 1.09, compared tan over average 0.57 Sila and Wel (2001) epor similar rer for ‘the 1988 taxrafcm in Canada The ding of gic higher axablelncome dst for ig-incme ini s particularly important fo the nay in chapter 4f the level ad shape he optinal income x schedule, pecs hes the vay droprsonste share of lncoe nd income tx payments contributed thee nvdul se Seo 200) pirical sues of the taabe income elastic, however, may overstate the pertinent ‘Sut Pt, someo he reduten intax payment deo tance my nce shits of ‘anale income to far yar ch ax when nda adder etremer coun Second, noted eae, thre may be shifts among tne ete. Slemrod (1996 indicae hat & substi sourceot the increnein personal ate income among thehiphestnconetaxpuye tert 196 act probably ined changing C corporation abe under the pee ncre {txt Seorporations nd peers ihe acme of wich epeers on nda esol tat ‘tun. Se lao Clon an Sense 2000, weho Sn more moderate sh Thin pote repiing endogenous sample selection and ont sures of income variation mt ea to reetimatog, correcting fr thee factor, Aten and Carl (1999) find an lacy of 054 ‘ather than 110 forte 1986 tax reform Adaonal Acute ae conoling fr exogenous ‘ur eeplarincome tena mean reversion in invidual inom a0 2008). ‘suds asdonacrafrms induding mary of those measringthe taxable income das, kmieenatin they comparebeharar shortly before and ater reform Many nvidle ‘may not havezealaed hat achangrap occured thse who ae maemo et hae thle to respond uly: ortho whe are more sary annie, aiatory behave may mask fc eaggerte the eet of reform, Fr example, Sammartino an Weiner (1997) suggest hat igh income inva ange the 1993 tc rte nereae an tha hed income fm 109391992, making appear hatte at icenes used substi eduction a ble Income when tis was ot nat the ase Slay, Gals (2000) infor the eh abort in oneyea)elastty of 36 but a onan hee year) east of 2 slgicant ater ring that eects table icome from the ener of options tempura spb in 1992 Sel Gooibe (20008) findng that top corporate eects espenss,cnsiting 208 of the shorter deci fn ase ros Income among ch taxpaer ewig the 1993 tax Incr amasentinly ue toincome sing tn parts wo thes dice, amber fades usea wider wind, wih three ears bengcommon Thetraetsthatcompasont ‘cross long periods of ime great increase the Whoo that fctoeseher han the tax rate hanes in question wil be response or ented eects wl mask eal response 0 €9 maker undetectable, wich sa major son that short te frames ae soften employe 1m rr, the etic of tna Income ot yt Brown with confidence Revert ppc hat hi last sigan ager than teeta of abr spy wi ea hous participation alone 2.ong fam Ey Probably the grees uncertaty concerning estimated behviel responses to labo Income aration dus othe fact that ng ran eating, wich anno realy be measured my wal ‘ouch gree than shoreun reponse More gradual er dyed But lately substantia‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, ‘har changed nial ines in human cal rab hehe eden, ‘ncidingspecalied pofensonal and vocational taining) ational deions (wheter to ian re ener plein ante eae) cnn hk ie "Tht eons nay have ch ore banal acts on parton, burs and earings ‘han d hora adjustment changin tara: kei, the length of he wrk dy and ‘thertructre of reduction eh ae thd o work exe hour eat Nome) ey Dereately fan nthe shor eum but might vary substantially ever the couse of deede Theses sto uue of nspoaesin the rao fnge benefit nd some othe forms of tae sence (or ‘rampl, the decison o workin sectors whee tax reduction opportunites are more pet Fathers abr supply and rested phenomena re usb inoece good del ys norms cncening wha constitutes azine and personal ais, these to mie ht ‘verte lng un f here ace suicient conomic pressures. Hence, I maybe tha ning tases ‘em 306 0% would moder reduce table income in the next er ears pede ery large redetonsover the course of eneration $e, forename, nbc (1993) imterprecation lng term nor ens or lng sponses to be signin preter than shor em ectins, tees hat uncompensated artes woul have f be fontria nsed, germ snompensied ‘eutices were near sto litle Ing term austment woud be necesary 49 intitustionl ‘actos that might otherwise limit the mage shore adjustments would be realy uinprtant constraints Furthermore, note that i 4 reste tar te, 9 which ‘bron eect ae abenyn neato (asumingtha ggepte marina taxater apse, {comers ar with icone Vey fre coarse it rowan viens, ‘who rece ne wafers, bu encourage labor eft fr high income vial, wo ay net ‘ara Hane, even if rme part ofthe income distribution ha an uncompensated long Tat esposiveness 1 redsurbuin ta is eat ao, so behavioral ajsments are not eed, latices, and scorn th erent fdr esponse shoul be increasing over ine. ‘Unfortunately, hares ied erp evidence that itminatr thi important su, Ae tenet posing ecbetion cee tre of thetic atc doepan'a ‘hee a wind which ay be ican wide to introduce giant confounding att yest nt wide enough capture many ofthe pertinent spon International compas alas be fri cane hee are lgcantSieencesin coun ewe of ation er btn periods of ime and ypc wok ats rch a engi af work week nd vsti) ‘ary as wel Howere, du othe even eater rage of pentily confonding fcr (or eample difeencsintechnaogy, factor svt anonzaton case eisunlear whether ‘suc anal would led ear ress. Prescot (2008 inate that dfarences between ous etka in he Unite Sates and Europe ae duet ferences in marginal tx ate, Whereas ‘Alesina, Clean Sacerdte (2006) oer eviece hat nated abate tedeencs arly to unlniation and regulon, wth enforcement of ference eating from soi retro fees Long term end of share work ay and work wees and anger atone a ecole eelpment advances sugpest that the uncompensated elatity 6 net —altbough ain Inference ee ic Beene 9 many ther contons have alo changed ignifeary ver time, Greetwood and Vndenbrouk (208) cole that higher wages have Hn ft ed 82 secreted hours over the past century, athough part ofthe deine may be atriated to techoologichanges that hee nce the valeur although ecology tat eee {he needfor hosel! lb as conte oan cone in emaelabor oe pastication. ‘commenting on won the lato taxablincone, ima (1990s) emphasise tat hereisa hierarchy of sponses: Taming shits och capt uns eazatons) are mest ey ‘made, ccountngchangrsan adjstments of orainsonal form arenextandearesponst srt las Totheextenthatthisisthecase the short tne ame michemgsiel workisproblematie elingn otal aintate x phone all ora few click ats western oneal fran lie work and moving oe fay to anther region can take yas taco ould india sother lw tines shoud eeepc have noe neopets tat mayen important tna‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, ‘ther simpicatons made fo analytical convenience my aio have important implications. (One particu concern inthis regard inves ignoring the posy of "jumpers individuals wh, in espa othe previously describe srt of pertain of thet schedule, might lacontnuously reduce thei labor soppy poslity noted at the end of section A. The ‘ax ncean at come yw nerd tobe infamaial oe tone earning soe 3, bat uch intvcals would be sl oad the tex incense hey redoced the earings ore ‘than marginally, some level below Tit phenomenon cn arse when the nx shale is oncoes, which occurs when marginal aes ar fling case that of interest ven the {oneoing ants apd theres of sialations eperte ter Tn thst event there may well be ‘ome individuals whe ar indferet between earning an income above and aioe below (7-38 When thirst there ational factor in the optimisation, cay avrg a lover Irursinalrate Indl who ap downoad response oa murginarate irate a) nse {sre lin reve with oon oil wel uion account of higher ty (ese ‘nada are nen, the in ty om edaed fer a consumption js eng ‘thet ain fom eed bor or). ‘Ths policy nly gnc for convenience, smetimes mative by tention hat ‘he number frpes is Waly to be smal Br pies wou ppt hat ues ny be sanicane In tems of evened, ther as ote, ocr revena fr ech mp Wwhezeas the reece gun fom thse who do not jmp i marin! one for each nial Inde ines aL’ (1998) examination of frpers in the two bcet ncome ts hit feral naps inticates tht joys ay well inertan, nd he salsa contr this (oeenat 18 « Simavon. The fregsng cussion ofthe is order condon (10) and of Fher completions rates dear that it ile to have azong a pir views ab wo the Hsly ‘contour of te optimal noninar income ax Benning with Mies (1971), anass have ‘ed smulstions elon the thet aaj with epi exits ae py, lance nd of itibtone fil or income inode to provide ations amination. OF couse, 2 ets ae aii nctony by the int of ering wedge the wos bu aed ty thereat mations of te mel eed "Thess eww emphasis ow the shape of the optimal one tx ie ‘tom iearity bene subsection 1 on the optima near income tax lea reports how the wer evel f taxation is feed by various parameter f the problem. Tuomala 1990) fers sesh reprt, "the marital ax ate alias income nreases eet a income eves within ‘he bottom dec ofthe dibusin” (9) Miers (1973) orginal cleo payed 1 sma tendency, but ater investigators questioned the ett 1 which the esl may have ‘pended on the oil preferences he stipulated or the agul high aber sup espone be ‘sumed Subsequent wok wee, gb that a eater scl peeence fr euler & lower aor spay response ens to incease the optimal level f marginal tox ast oe not perry rvlin ott diferent shape forthe tax scheint her ong feaitarionpreerences nor ver ow aber sup sponser beth ncombinton wade Increasing marina ates high nome levels For example, none eve of interes, Tula reports that ower abo response lads to higher pti margin tax rts, but teases {he opto maria arate mae fr lower: an mideincame viata for Nigh ‘income indivi, Thie et ave in kod eta (1994) ndings rpeted ei or {he cptimal two beat income x Tuma also considers the strength ofthe endef tbe sptimalmargnaltarttetosppoachoratthetapendftheincmedstiton He ids ht, {lings magna arts ar perl fallng tthe high nd they do ot rally eprech 7, notevenatte9.9 percent the dirbaten. ‘ory Kaur and Toma 1998) fers what may be important uieatontheve revs about dacraing marginal tax rates Thi cleltion gps tht whe requ in the estsibuon of individual’ sities (wage) ic gnicanty greater than peviouly assumed _Abwtqganaes they suggest areal lausble) optimal marinaltaxraesdoincease with‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, ‘nome ovr subsea range, although fr wper income nv optimal marginal ates ‘ure stention hasbeen devoted to eplrng the ec ofthe shape ofthe tsbuion of india’ abies onthe shape ofthe optimal tax schale. Diamond (998) abe ‘tamine «Pate dstutiono sil Gisend ofthe comely wed lognormal tution), Linder whch the (1 ~ Ff component of 10) sts more raps the upper end of the sebton nd nds eat optimal marl tax mts are sng atthe top However, aban land Seaweryskts 200) simalationsneate dat Diamonds sult was deve I age prt ‘yh adiional assumption tha references wee quai lines, hus removing income fect Nevertheless diagrams do gp constant with Dumond’ ci, ht moving fom lognormal to a Pareto estibution faves higher ate falling, bat notably les aich-—at the tp ofthe income distbation. Sez 2000 sing income dssution data the United ‘states fo 1992 and 1995, fds tat the shape ofthe dtebution of (A I ue that ‘optimal rates shuld ll uty, wel noth middle of he income dtu, 2 a2 Inco of ppronimately $700 seul approximately $200,00, andthe be sential fat ‘thereter For example nhs smulion with wearin welfare fenton, campensted ‘sty of ber supply of 0, and feo fr fr wily tat has Income eet, is ‘ptimal schedule has amar rite ear 0 athe ottomof he income cation hat ale 1 appenimataly SO at 675,00, and then rasta about 6S a the upper end where thy lev ff Hower his onetionl form for uty has income effet that se with income to an exten that the uncompensated atciy approaches eo at w icrene, which favors Nghe mil tera the top than eter. n sum, Income fc dln prea thle ‘magntidenearthe sop oftheincome siren, my wel beimpoctant indeterining P regi tax ates but explorations ode ore istic to provide get cary reging the ‘unomanon for further examination se Dahan and Stamey 2008. ‘tooth important concason in Mile (1971) oxgnal work sth he optimal orinar tare onlalinear income tax which may have administrative avartage) itd AS etd, ‘ebequen vegas sport ange of caer i which the opal nnlnes come tat eprts moe substantial fom ia tat ey done erly eo owe mch ace Toei iced in ing only 3 near chee. Recall that Slemrod ea (1998) simulations Inet nly modest wel uns in moving om ner a oa two-echat a (t aing ses ‘an adona et for the siaations that, atthe optimum, note acon of {he popu doesnot work, ad hs fraction I Ire whem soll peerenes favor greater ‘edition and when the labor supply ela i higher. This outcome sould hay be ‘sping bea asthe anal. 10 and the sitions sugpe. hgh magnates tent tol optimal at the tom ofthe income drut, along with abla Rltedy.fe peodctity ands tet rvents ccd when hove with ery/ow ail arid oto work, whereas banal revere aad from hereof the population fo whom ‘magia tz rateron her st dallas ofincome st nfamarsna ‘ot the ana nd the simustion ret make car tht sing pi views about tbe shape of an optima income tax sched, and of how tat shape depends om the extent © ‘heh cal prefeencer re plan cannot be tained Both ube he aan fri cotngecie concerning nt ony ebor pty lances at abo ether rps of Invi’ wt unctons and the shape ofthe dsb of undertng abies mabe liu oof confident statements eve fer engaging inte relevant ingly. A few broad onclsions, however do seem pose Frat sn fori, owe bor up ate guatrundetyng inequality, and ater sock preference fr eqaizng incor all nmap fer higher marginal ate, which Income tx is approimately ier his ue may be that there is ile sg ae‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, ow large wansferto be funded However tough each f these factors favershigher over {ax rues, none har an unaiguoue cect onthe shape of he optimal nce tax sl ‘This pon west by See aL (1994 tweet income axils ais ‘eintrced by the analyte nations othe moe peal nonerncae ARG recalom chapter 2, sone abstracts rom enti consertions, tah anonrdstribtv ta snd the mort redrbutve tae inert Ow an 2 100% rt) ence eet bv hy ‘ne should have expected le ptr devitions fom neat for intermediate epee of rmdir, thermore, whatever deviations fom inearity prow tobe optimal tent certain how enportan hey aefor socal were Ste1976 siatins suggest thal he welfare beets ‘om retribution under an opal inearincome tax maybe on te ore of 5 of national Income: hme et (1996) sialations fund much smaller incremental gi fom ang sadn bach: andworkon optimal noninearincome tanation har no fered tani {nfrmaton on the benefits farther refinements fe wee fact te tha ner ta ‘chewed mom of the ntaigabe befits, this conclusion would be sgn in ph ofthe vantages in ters of administration and iting tx avoidance of certain ina scheme Fick svsleor ate ade tes an weithoingon wage constant rte ‘aly entering to conser the relsionship between the optima nce ak and ‘wafer there andthe acre erploped in devoped ovat ™ Optimal leas of ae ‘veut high mary of te sitions, her than versed in mary such counties. Te {sp ese than may St apa since he tan tants in he aa ese take once al forms of taaton, na jst those nly esrb as Scome taxes) OF cou, evting sytem ar nt he pac of massing analy refered scl ee Factions ber scene efit politi canomy considerations Beyond the scope of ‘heprsent netgnton = agating the shape of taxa tranaer schemes, the simulations rater unfemly suport fat ig marginal ates tthe wer end ofthe Income estibaton. This certainly n acon with rate when ne takin count the pid phate out intanser programs ded at ‘ele se, the en produce agree maria ax tein exces of 100%, wel above wat ‘s optima Soh high marginal ate are tought oe ina sgnfcane number of waity Inv not working al andthe com in many ofthe latins, Neti seo incenie ae oem bce eleven lt wera the higher maria ates re Infemargoalorallindvidual with gherincomes fr futher eberstion se chapter?) ‘Ahough many simulations suggest hat optima ates are aling athe tp ing marl rates (ore ery at marginal ates beyond upper middle oficome) ae xine tealoyed Thus often proposed and semis enacted idence an cus may DcOEATY ‘othe optinal prescription Semrodeta (199) emphasie that te optial sec nonineariyn hes wo bad income uses i mide income taxpayers paring mote elie toa ear scheme tothe bene of bth the poor and the eh Flies may ofr an exlanain fo tis ‘Hrerpece beeen the epenum end race, notably ft ets ae early nencd the refrencesef medlan voters On he othe hand fone accepts some af he subequen alee Diamond (199) and ae (2001, the optimal shape may more cll match what istyicaly bere ‘nny such comparison ofthe optimal to the actuals eject tal the foregoing caves concerning wht in fact eal adion optical economy consieratos Furthermore, ‘mary actors sentient et chapter nin some others hat ew may el friar ‘evson neha wiles on theater te whchexting tx and tae atm an Propet? ‘ethougt oas cota andor ar re heel they atl aye ne 7 eNO‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, shen atin cmp ni cre ery ce popeieierpelraeesinyerevsscnreisiarsesianeraeeney tater utp bah py rym rao comp ture ttn te nan tn ease maar nc pp pt se ne ae ek i tn ni Mn pg ha ‘evn ind tg 0, gi oma 9 20 tea uy rao on npn ey nw i ‘Sl Shncneaigs tapos are oeencronp a sghah) orate ls ‘yyy ent nt eine a wan cha) ‘Saenger nthe Ati hee gain ‘Sevier ay mn psn eye i Soret SE ees neem tenner gece Seago ppt engage eae ‘ew ton yen tnt cn wi ac tb payne) iepeanttanieenen setae ecm hy ede boned gt gl yy ‘opto! th ps ne te ee maui) er a me ib eh ‘Frsimentnspincoatior anionic ‘Sst eed ier a papi ey pt pin tnt Gu ht mp mee gp pay a me, ‘hs 90 ew Sat he Son ws er toes py oe oa‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, serie tenn apt mea torn ta pre crn ‘atu ommended inspe n o Froateetisrnee aaerronpinineaTemeanmaretinerwnnirtsst raion sta arena pape tae Tok [Seem ete ab reenter ee ‘inp ewehanerg shy samen neem ‘tiene amare agate Noise ome pa ‘Stent oun Gop ansG07 math ny gi ath er espe ete nae er ag gn Sata pyacune tant oer nanan ea de eT SSIS nnen te pgepeterepetonl re ‘Siete ctmecnnene poe megnsterecocteetetepncocne e ‘cn ernie ts meen emt cn en ee ‘pea ty foci etn attrenr conan ona eae Chemarens ten tethers eeaeratear oer enan tes cert ‘Seve et an nian satay a el lp ae "Sener rnin en my inn omer era btn, cesta ano corn) rea ean Seen‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, [tenet rsomnnst terete sien mah henna arnt cna rtm‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, Elaboration and Extensions ‘Te casa anys of the optimal labor income taxation problem presented in chapter 4 roggets the importance f farther exploring the etic of labor supply. Adon, ‘that anal i rb fo numerous quliatons reping mates of adminsraon, the rationship beeen income and undying ering ability, the mature of iniviualé _efrnces various market imperetions mera equlirium considerations andthe factor. ‘alc caper ref considers thee tes. Many ofthe queons adres here hav etn lume attention dept thei potential siguficane and some ks tat hae beefed fim peterecutiny nevertile emia usec ‘A Behavioral Response to Labor Income Taxation prea work on the incentive els of labor Income tation has gone huh many rections, This section gine with tdi the eaticy of abr spp, henna mate ‘erponse, aly consider the long-run efits of tation which yb poeta by sigevidence, 1 Labo Supt Eastcy Inialy, most empirical work sumed tht changing am indus marginal ta rate has tsseotly the sume eet as det chaning te before ax wage This ew follows om the India fet ode ond fo bor olor (4.2), indicating that bbavie depends onthe fertax wag, (1-7) Futermore, much oth erature viewed abo efor in test outs focused onthe aor supp of working age male This search general Metifid quite lator uply aces. Compensted dates were fen fund 16 be nea. 02, which lnpesan eat of sabtution betwen and consumption of er (inthe pariear CES ity functions fe ue inthe optimal ncome tx simulations opera in chapter 460 ote 2 thee ‘An important ey efinement acount forthe existence frat graduatinin exiting income tax tems inet of he fact that taxpayers beavie wil eect not aly the pertinent ‘aria taxa ut loncome efit a to marginal ne ower lvl fice, Werk bY ewan (1961) designed to adres titre and other) pier compensate abr 2757 lai sigicamly higher han tha found in previous work Subsequent reser hoe paral by Nacurty, Gree, and Pach (1990), gps tat sch eauks ae products of restrtonsimposedy the estimation chniqe Thal eanalyslsprodcesrecutscloertothose bane i nti ae obit anaes?THE THEORY OF TAXATION ‘Another extension atnds to woth labor force particpation decisions empasteg n Heckman (1993 rar there ae Send otf entering the aber mask invidlece “ace chore betwen worhing fr ours ond giant umber of ous Frere i {axe incase indoces even 3 ew percent of workers ithe lo ta ene Sl! beat lag a ithe env workforce reduced ous y fet percent The arpton deco May ‘eprint imporan fr married women, my af wham have are opin at to we “snlace high marginal tes een on aestexrings” ‘Theemerzetconsenss was tat ned telat of married women abor supply was ssbsanily reser han that of men (or single women (the survey by Kilingrworth and eda 1986). Reals by Mer (1987), however, inaes at many of the results were ‘afc of pool specie mpc models and he conclude that marted women hous ‘eft nea: Nevertel subsequent work suggests hat mari women abr SPY ‘notably, tee partiition decision) salty responsive to sation tn gt of thee ress some hate proposed changes inthe manner of tating two ame aie, sbjet considered further subsecton 121.8 More rece a an Kab (2007) nd that are womers nba supa isfy ju over SO% fom 1980 to 2000s tha ni expect ain ‘ter putin ts, response pon earnings) mated wore aor mpely bebe 2. ree nome aici, ‘ehasiongbeen understood that beavior responsestotaaton tena confined tprtption snd hour as fOr exams, asen 1980) To adres tis point empl Lindsey (1987), ‘ele (1995), andres pope that one examine the respons of taal Income wo changes ‘in tarates ora rave se Girt 2000 Tale inca termined nt ely yPstiaion shows bu alot nena of ert ob cc, the ction of compen eed a ta |AND PUBLIC ECONOMICS ofr ings nets ther avoidance activity, nd eason 1m hong thi approach ie ppealing because tatbl came by fition, wate abject inerteAconingy one shoul expect individual eponas oar change tobe quaitaty mor varied and becuse there are moe margin of esponse owl more sustntl han heir Terposct os change inher before nx wap! Moreover ar ise (199} emphasise many 1 thee repores von itortione Whe thote duet spl bor spply response #0 the ‘ela implications ae similar ind are ptm marginal responses changes in aration should produce the same incremental deadweight lng equal othe marginal tax ‘ate whether they inva the substiutin of ese for work er the substitution f age benefits for cash, ceptions ae tax peered actives that confer postive externas (6h as chara contbtions er ht augment cepts romother se or eames rom the persona the corporate income tax ae). elds (1995) sey ofthe fects ofthe 1986 Tee Reform Act Ads tae income lacy gener than oc eu # 1.0, «gure that is sbsarialy Nghe than pevioly mesure lor sppy elas? sina ndings were reported by Auten and Carl (1998) nga ager Treasury Departement databse and by ott and Wile (2000) ung a pane spanning sn years Gol (2008) by conta ind thatthe 1986 refer ssc with 1 lati ft ovr ened wet oom accounts Sr nceree growth nlf to ttn hang. Gruber nd et (2002 examin altar reforms in the 19808 and a dutty of 14a Ser (2004) ns hat fom 1960 tesugh 2000 reported income ws aeapone 8 tax te Changes except fr « mest reaction by those with incre nthe top 19 Gealbee (0998) determine the arable come iter soit with ta reforms Between 1920 1097S and fn etna we values than thse eprint of mare rect fem, ‘ugg that the higher estimates may aie fom various uncontrolled iss sai nd enbug(19%6 estimate the ects fthe 199 tx eforn and nd an etc of 0.74 San 2d ll 2001 scythe 1988 ax efor Canad and idan dat of only 025 F‘THE THEORY OF TAXATION AND PUBLIG ECONOMICS, ‘sting empirical estimateshave one-shot haar ean opal gains before th ve (dteofa emanest ate crn can bedone oly once oe the og run under ae ee, ‘uh tepsitional ects ae of leer consequence atbough the ile ee may py hee beaver tepaing pattern f alannah) 2 Problems of implementation 1. Adminstration an xfercement ‘The nays of optima income aration in chapter 4 doesnot aout fr plc miniatve snd printe complance cots or problem of ta avoidance and evasion? Howe, es ‘hou thee considerations unre the framing ofthe optimal income tax problem ety, Ie isorinalyatmed tat income tation, including «nonlinear scheme under which es ‘eceaary teatebieincometo prt tapaer.is fase whereas aondsterenaey) ‘nae nvduis ering sbi tot. ven ach aneumptians are wel fr anal they ‘se farfomth tah Forenmpl nthe United Sates, plc and pie callecton cet fo the ‘ncometaxaraproinsely 10% of evens and inerimated ha over 15% of aby unpaid As emphastaed by Mares (1971), Atkinson and Sig (1980), Stemo4 (19900) and ter, anys of optimal ax poy nado ab abroad view tht drs the choke ong ‘axes, tbe manne in which practal considerations inoene how exch compos held 1 impliment and enfincementpley—and see the ntacensemeng thew desl the potion. The presen ton te Bed to conierng soe of the pisipl ways hat ‘siinisetionand enforcement bea on theforeping discussion of optimal incre tation a ‘seortingy on application tought his ook. ort dey, the poe of tax aweidance and eaton suggests tht higher tx ater to nvole more alr than otherwise tee a decribed in eto tis eagniion eves much oft motivation fo the move fom naw marae aor spply epee ‘he nay and silations presented in chapter indicat, grater east tens to fer lower trates, Frtermers, the emp wrk sured in abeection A? wagers thatthe slay paricalarty get for ery high-income naval Tis tndency or ower tet ox na linet nome tat and at the top end for nonlinear ax erestngy ei dierent responsiveness isprebbly not aconsequenc of evasion which appease deine wih incoe in pecetage ers e explanation being hat complance parc lw in thea eno, onsisting insignia pat of smal businesses and lowe nae india who work i henfrmal ector Ite the reser ae come easy fr hphsncore axpayes ie robuby deo suchinduals engin eccuptions with reser vide opportune. Shnsod and xopruk(2002) emphasiae hat the atic of wae income paula it relate totaavolance and easion lat exgencurbutether nae product af govenment paley Although greater problems of woidance and evasion tnd to for Lower tx rte tt eo true that higher txts warrant reser expends to reduce avoidance and evasion 9 ‘he exten ha theater i scomplied the ring eat of esabi come wl be owe, hich ital wisi even ghee. ‘Moc Woulysineraive un enforcement concaressou et be undrtodotpr some list of ux plc ete, long with eency ely, ands forth (ee subection AZ inthis regard tad at moe recent analytshae indicted thes factored tobelntegat lotoan opal sation famewoc wth an expt SWE Inthe words Stateatthe cse, ‘hepoben seal een fant option Theducaion tax hse brndenngin bec ‘Aamincrative and enforcement considerations are specifically relvanto the cok between nar and nonlinear income tax Anes tax asthe signa adratage that irrelevant ‘wil moe collect a mach ven and, ven the amount of revenae they do col, wl Tse ae