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"Taxation, Heterogeneity and Employment"

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Innovative tools for optimal tax schemes

European researchers developed novel mathematical models to examine the suitable design of benefit and tax programmes aimed at promoting employment and reducing inequality among different groups of people.

Industrial Technologies

Thanks to EU funding, the project THE (Taxation, heterogeneity and employment) elaborated a theoretical toolbox with a broad range of policy-oriented applications. These tools enable the team to work out several multidimensional screening problems or multidimensional heterogeneity that are difficult to tackle. Project partners supplied methods for models with intensive margin only and models with both intensive and extensive margins. Examples of intensive and extensive margins are decisions on labour hours worked and decisions to enter the labour market or not, respectively. The toolkit addresses many policy-oriented issues and allows for the introduction of additional sources of heterogeneity in tax models that can be solved and implemented with real data. A number of optimal income tax models were examined that consider various sources of heterogeneity. One was heterogeneous income elasticities that combine different labour supply elasticities and various dodge taxation skills. The team determined how multidimensional heterogeneity in terms of skills, income elasticity and tax avoidance ability influences the optimal tax schedule. Other sources of heterogeneity included exogenous taxable non-labour income such as inherited property rents perceived by landlords and endogenous taxable non-labour income like capital income. Lastly, researchers addressed three applied economics questions that have been neglected in existing tax studies. The first involved determining an optimal tax schedule over the entire earnings distribution that satisfies equal opportunity. The second concerned the use of workfare when labour supply is modelled along intensive and extensive margins at the same time. The final question examined how the recommended tax system is changed when distortions occur from labour market deficiencies. THE developed an optimal income tax schedule when individuals differ along multiple unobserved characteristics. Its methods enable recognition of different skills and support taxable income elasticities.


Tax, employment, taxation, heterogeneity, labour, tax models, income tax, income elasticities

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