Optimal Redistributive Taxation withBoth Extensive and Intensive Responses

This paper characterizes optimal income taxation when individuals respond along both theintensive and extensive margins. Individuals are heterogeneous across two dimensions:specifically, their skill and disutility of participation. Preferences over consumption and workeffort can differ with respect to the level of skill, with only the Spence-Mirrlees conditionimposed. Employing a tax perturbation approach, we derive an optimal tax formula thatgeneralizes previous results by allowing for income effects and extensive margin responses.We provide a sufficient condition for optimal marginal tax rates to be nonnegativeeverywhere. We discuss the relevance of this condition with analytical examples andnumerical simulations using U.S. data....