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Optimal Income Taxation

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Optimal Income Taxation

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    1. Second SIAM Conference on Mathematics for Industry Optimal Income Taxation Luma Vasiljevic Michigan State University

    2. Second SIAM Conference on Mathematics for Industry Background In 1972 the Nobel laureate J. A. Mirrlees proposed a method to compute a tax schedule most beneficial for the society He proved that the marginal tax at the high end of the income distribution should be lower than the marginal tax at the middle of the income distribution Only income earned by work is considered

    3. Second SIAM Conference on Mathematics for Industry Model: Individual Response Subjected to tax individuals tend to maximize their utility, i. e., n is the skill parameter ability to earn money per unit time y is the length of work day normalized such that y is between 0 and 1; hence income per day is ny x(ny) = ny t(ny) is the after tax income of a person with skill parameter n u(x,y) = alogx + log(1 y) is the utility function; a is a weight

    4. Second SIAM Conference on Mathematics for Industry Optimization: Government Viewpoint Assuming a log normal skill distribution with probability density function f(n), the goal is W: Total Welfare in the society is proportional to the expected value of utility Conservation of wealth constraint: The consumption of the society can not exceed the production

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