Optimal Piecewise Linear Income Taxation

Given its significance in practice, piecewise linear taxation has received relatively littleattention in the literature. This paper offers a simple and transparent analysis of its maincharacteristics. We fully characterize optimal tax parameters for the cases in which budgetsets are convex and nonconvex respectively. A numerical analysis of a discrete version ofthe model shows the circumstances under which each of these cases will hold as a globaloptimum. We find that, given plausible parameter values and wage distributions, the globallyoptimal tax system is convex, and marginal rate progressivity increases with rising inequality....