TY  - JOUR
AU  - Slemrod,Joel
AU  - Yitzhaki,Shlomo
AU  - Mayshar,Joram
TI  - The Optimal Two-Bracket Linear Income Tax
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3847
PY  - 1991
Y2  - September 1991
UR  - http://www.nber.org/papers/w3847
L1  - http://www.nber.org/papers/w3847.pdf
N1  - Author contact info:
Joel Slemrod
University of Michigan Business School
701 Tappan Street
Room R5396
Ann Arbor, MI  48109-1234
Tel: 734/936-3914
Fax: 734-615-4323
E-Mail: jslemrod@umich.edu

Shlomo Yitzhaki
Department of Economics
Hebrew University
Mount Scopus
Jerusalem 91905
ISRAEL
Tel: 972-2-659-2201
Fax: 972-2-652-2319
E-Mail: shlomo.yitzhaki@huji.ac.il
AB  - We investigate the optimal rate structure of an income tax system that is constrained to have only two brackets, plus a demogrant. We find that, in a two-class economy, Pareto efficient tax schedules feature at least one marginal tax rate equal to zero, and that the marginal tax rate may be increasing or declining. We next use numerical optimization techniques to study the optimal structure of such a tax system in a multi-person model that is a stylized version of an actual economy. We discover that in all cases the tax rate in the second (higher) bracket is less than the tax rate that applies to the first bracket but that progressivity, in the sense of a uniformly rising average tax rate, generally obtains. Compared to the optimal one-bracket (linear) tax system, both the highest and lowest income individuals are better off, while a middle range of taxpayers is worse off.
ER  -