Redistributive Taxation in the Roy Model
We consider optimal redistribution in a model where individuals can self-select into one of several possible sectors based on heterogeneity in a multidimensional skill vector. We first show that when the government does not observe the sectoral choice or underlying skills of its citizens, the constrained Pareto frontier can be implemented with a single non-linear income tax. We then characterize this optimal tax schedule. If sectoral inputs are complements, a many-sector model with self-selection leads to optimal income taxes that are less progressive than the corresponding taxes in a standard single-sector model under natural conditions. However, they are more progressive than in canonical multi-sector economies with discrete types and without occupational choice or overlapping sectoral wage distributions.
We are grateful to the editor, Robert Barro, three anonymous referees, as well as Craig Brett, Philippe Choné, Emmanuel Farhi, Mikhail Golosov, Sally Hudson, Matthew Weinzierl, John Weymark, and seminar participants at the 2012 Taxation Theory Conference (Vanderbilt), SED Annual Meeting (Limassol), NTA Annual Meeting (Providence), 2013 ASSA Meeting (San Diego), NBER Public Economics Program Meeting (Cambridge), UC Berkeley, University of Georgia, University of Michigan and LMU Munich for helpful comments. All remaining errors are our own. This paper is a significantly revised version of the earlier working paper that circulated under the title "Entrepreneurial Taxation and Occupational Choice." The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Casey Rothschild, 2013. "Redistributive Taxation in the Roy Model," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 623-668. citation courtesy of