Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/108811 
Year of Publication: 
2015
Series/Report no.: 
CESifo Working Paper No. 5265
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We solve a large class of multidimensional adverse selection problems with one observed action, to derive the nonlinear optimal income tax schedule when individuals differ along multiple unobserved characteristics. Based on a perturbation of the optimal allocation, our method allows individuals to have e.g. different skills and different taxable income elasticities. Our optimal tax formula generalizes the one with only one-dimensional source of heterogeneity and is numerically implementable. We find that, compared to the case where individuals differ only in skills, allowing them to also have heterogeous taxable income elasticities leads to substantially different optimal tax schedules and in particular, different asymptotic tax rates.
Subjects: 
optimal taxation
multidimensional screening problems
JEL: 
H20
Document Type: 
Working Paper
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