The Simple Economics of Bunching: Optimal Taxation with Quasi-Linear Preferences

17 Pages Posted: 11 Dec 2007

See all articles by Jan Boone

Jan Boone

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); TILEC

A. Lans Bovenberg

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2006-01-11

Abstract

This paper models unemployment as a binding non-negativity constraint on hours worked in an optimal income tax problem with quasi-linear preferences. We show that bunching of workers resulting from this binding constraint provides a more convincing description of the bottom of the labor market than bunching due to violation of the second-order condition for individual optimization. Although a binding non-negativity constraint destroys the closed form solution of optimal marginal tax rates, the optimal tax problem can be characterized in a two-dimensional diagram in which comparative statics can be performed in straightforward fashion.

Suggested Citation

Boone, Jan and Bovenberg, A. Lans, The Simple Economics of Bunching: Optimal Taxation with Quasi-Linear Preferences (2006-01-11). Journal of Public Economic Theory, Vol. 9, Issue 1, pp. 89-105, February 2007, Available at SSRN: https://ssrn.com/abstract=1066052 or http://dx.doi.org/10.1111/j.1467-9779.2007.00299.x

Jan Boone (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

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Centre for Economic Policy Research (CEPR)

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A. Lans Bovenberg

Tilburg University - Center for Economic Research (CentER) ( email )

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Tilburg, 5000 LE
Netherlands
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Centre for Economic Policy Research (CEPR)

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United Kingdom

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