UCLouvain Economics Seminar - Alain Trannoy , AMSE

December 01, 2022



Doyen 22, Place des doyens 1

Alain Trannoy


will give a presentation on

Productivity Shocks and Optimal non linear Income Taxation


In the literature on inequality and risk, changing distribution densities at the margin has been popularized as mean-preserving spreads by Rothschild and Stiglitz (1970). We import this idea to propose a definition of a positive productivity shock into the optimal nonlinear income tax framework à la Mirrlees. We then study the impact of a positive shock on productivity, taking place on a given interval I, on the optimal allocation and optimal marginal tax rates. We derive a general result for the class of rank-dependent social welfare functions consistent with Lorenz ordering (Simula and Trannoy, 2022a,b), including the maximin as limit case, with no condition on the elasticity of taxable income. Specifically, we show that the change in optimal marginal tax rates is non-monotonic on I. Our theoretical findings have meaningful empirical implications and can be used as a test of the optimal income tax model. We look at the fiscal situation in the US to provide an example where the predicted tax change according to the theory is verified, roughly speaking.

joint with Laurent Simula (ENS Lyon )

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