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Practical Optimal Income Taxation
Abstract: We review methods used to numerically compute optimal Mirrleesian tax and transfer schedules in heterogeneous agent economies. We show that the coarseness of the productivity grid, while a technical detail in terms of theory, is critical for delivering quantitative policy prescriptions. Existing methods are reliable only when a very fine grid is used. The problem is acute for computational approaches that use a version of the Diamond-Saez implicit optimal tax formula. If using a very fine grid for productivity is impractical, then optimizing within a flexible parametric class is preferable to the non-parametric Mirrleesian approach.
Keywords: Ramsey taxation; Optimal income taxation; Mirrlees taxation;
https://doi.org/10.21034/sr.626
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Bibliographic Information
Provider: Federal Reserve Bank of Minneapolis
Part of Series: Staff Report
Publication Date: 2021-07-30
Number: 626