Abstract
In this paper we propose a computational approach to empirical optimal taxation. We develop and estimate a microeconometric model that is run to simulate household labour supply decisions and the implied economic, fiscal and welfare effects. The microsimulation is embedded into a numerical optimization routine that identifies the tax-transfer rule that maximizes a social welfare function. We consider the class of tax-transfer rules where net available income is computed as a 4th degree polynomial transformation of taxable income plus a transfer. We present the results for six European countries: Germany, France, Italy, Luxembourg, Spain and the United Kingdom. For most values of the inequality aversion parameter k that characterizes the social welfare function, the optimized rules provide a higher social welfare than the current rule, with the exception of Luxembourg. The optimized tax-transfer rules are close to a Flat Tax plus a Universal Basic Income (or equivalently a Negative Income Tax).
Original language | English |
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Pages (from-to) | 4-43 |
Number of pages | 40 |
Journal | International Journal of Microsimulation |
Volume | 15 |
Issue number | 2 |
DOIs | |
Publication status | Published - 31 Aug 2022 |
Bibliographical note
Funding Information:We thank two anonymous referees and the participants to the Workshop on Labour Income Taxation and the Labour Supply (LISER, January 20, 2020) for helpful comments and suggestions. Ugo Colombino thanks LISER for financial and organizational support.
Publisher Copyright:
© 2022, Colombino and Islam.