Handbook of Public Economics, Vol. 5

Chapter 7

Optimal Labor Income Taxation

Thomas Piketty^* and Emmanuel Saez^†,‡,    *Paris School of Economics, Paris, France, ^†Department of Economics, University of California, 530 Evans Hall #3880, Berkeley, CA 94720, USA, ^‡National Bureau of Economic Research, USA, ^*[e-mail], ^‡[e-mail]

Abstract

This handbook chapter reviews recent developments in the theory of optimal labor income taxation. We emphasize connections between theory and empirical work that were initially lacking from optimal income tax theory. First, we provide historical and international background on labor income taxation and means-tested transfers. Second, we present the simple model of optimal linear taxation. Third, we consider optimal nonlinear income taxation ...