Optimal Income Taxation With Quasi-Linear Preferences Revisited

Properties of the optimal income tax for quasi-linear in leisure preferences are studied. With utilitarian or maxi-min objectives, closed-form solutions are obtained. Bunching occurs over intervals where the second-order incentive condition is binding. Whether this occurs depends solely on the skill distribution. The patterns of consumption and tax rates in the nonbunched range are independent of whether the second-order incentive constraints are binding. Bunching at the bottom can also occur if a non-negative constraint on incomes is binding for some households. The pattern of marginal tax rates depends on the skill distribution and whether it is truncated.