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Optimal dynamic nonlinear income taxes: facing an uncertain future with a sluggish government

Berliant, Marcus and Fujishima, Shota (2012): Optimal dynamic nonlinear income taxes: facing an uncertain future with a sluggish government.

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Abstract

We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government is sluggish in the sense that it cannot change the tax rule as uncertainty resolves. We argue that the zero top marginal tax rate result in static models is of little practical importance because it actually holds only when the top earner in the initial period receives the highest shock in every period.

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