Optimal taxation with multiple dimensions of heterogeneity

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Optimal redistribution with a shadow economy

“…In principle, the income schedule of formal workers also can be discontinuous. This happens when tax regressivity is strong enough such that the second‐order condition of formal workers ceases to hold as a strict inequality; see Bergstrom and Dodds (2021) for a detailed analysis of such a case. For simplicity of exposition, we abstract from such a possibility in the theoretical analysis with the following assumption.…”

“…Bergstrom and Dodds (2021) study jump responses in a Mirrlees model with multidimensional heterogeneity.4 Based on ILO (2018), the national share of informal employment in total employment in Latin America has a mean of 58.3% and a median of 59%.…”

“…33 Bergstrom and Dodds (2021) study jump responses in a Mirrlees model with multidimensional heterogeneity. …”

“…Hendren (2019) speculates that may exist even with jump responses, but does not prove it. To the best of our knowledge, Bergstrom and Dodds (2021) are the first to use the Leibniz integral rule to obtain with jump responses.…”

Welfare Analysis of Changing Notches: Evidence from Bolsa Família

“…Thus, our lower bound for the WTP for jumping households is exact for an infinitesimal reform. Note, however, that the jumping households still have a first order impact on social welfare through their effect on the government's budget as each jumping household costs the government b dollars (despite the fact that the mass of jumpers is measure 0 for an infinitesimal reform; see Bergstrom and Dodds (2021) for further discussion).…”