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Optimal Tax and Benefit Policies with Multiple Observables
We study the optimum for tax problems with multidimensional tax bases and multidimensional heterogeneity of agents. We use the Euler-Lagrange formalism to show how the optimal tax function balances efficiency versus equity considerations. The equity considerations are captured in a localized distributional characteristic, a generalization of the distributional characteristic first introduced by Feldstein (1972). We apply these findings to the optimal joint taxation of couples, and to the optimal mixed taxation of capital and labour income. We show robustness for pooling, bunching and restrictions to the tax base.
