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  5. Sufficient Statistics for Nonlinear Tax Systems With General Across-Income Heterogeneity

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Sufficient Statistics for Nonlinear Tax Systems With General Across-Income Heterogeneity

  • Antoine Ferey
  • Benjamin B. Lockwood
  • Dmitry Taubinsky
American Economic Review (Forthcoming)

Abstract

This paper provides empirically implementable sufficient statistics formulas for optimal nonlinear tax systems in the presence of across-income heterogeneity in preferences, inheritances, income-shifting capabilities, and other sources. We characterize optimal smooth tax systems on income and savings (or other commodities), as well as simpler tax systems. We use familiar elasticity concepts and a novel sufficient statistic for heterogeneity correlated with earnings ability: the difference between across-income variation in savings, and the causal effect of income on savings. We apply these formulas to the U.S. and find that the optimal savings tax is mostly positive and progressive.

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