TY  - JOUR
AU  - Battaglini,Marco
AU  - Coate,Stephen
TI  - Pareto Efficient Income Taxation with Stochastic Abilities
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10119
PY  - 2003
Y2  - November 2003
UR  - http://www.nber.org/papers/w10119
L1  - http://www.nber.org/papers/w10119.pdf
N1  - Author contact info:
Marco Battaglini
Department of Economics
Fisher Hall
Princeton University
Princeton, NJ 08544
Tel: 609/258-4002
Fax: 609/258-6419
E-Mail: mbattagl@princeton.edu

Stephen Coate
Department of Economics
Cornell University
Uris Hall
Ithaca, NY 14853-7601
Tel: 607/255-1912
Fax: 215/573-2057
E-Mail: sc163@cornell.edu
AB  - This paper studies Pareto efficient income taxation in an economy with infinitely-lived individuals whose income generating abilities evolve according to a two-state Markov process. The study yields two main results. First, when individuals are risk neutral, the fraction of individuals who face a positive marginal income tax rate is always positive but converges to zero. Moreover, the tax rate these individuals face also goes to zero. Second, Pareto efficient income tax systems can be time-consistent even when the degree of correlation in ability types is large.
ER  -