Econometrica: Jan 1986, Volume 54, Issue 1

Power and Linear Income Taxes: An Example<87:PALITA>2.0.CO;2-V
p. 87-94

Richard M. Peck

This paper amends the Aumann and Kurz single commodity "Power and Taxes" model in several ways: A linear production technology is assumed, incentive effects are introduced, and tax schedules are restricted to be linear. A theorem is stated which characterizes the linear tax schedules which are the NTU solutions of the model. The solutions of an example are computed, providing a perspective on a result of the Aumann and Kurz model that equilibrium marginal tax rates are not less than 50 per cent. For this example, equilibrium marginal tax rates are less than 50 per cent; incentive effects appear to be responsible for the low tax rates.

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