Volume 22, Number 3 (Summer) 1987
Moffitt, Robert and Michael Rothschild. 1987. "Variable Earnings and Nonlinear Taxation." Journal of Human Resources 22(3):405-421.
Tax and transfer programs transform before-tax income into after-tax income. Income is variable and the tax and transfer system is nonlinear-i.e., marginal tax rates vary. We show that, as a consequence, the tax and transfer system punishes (and rewards) income variability. We calculate the effect of the nonlinearity for several components of the U.S. tax and transfer system, focusing on the low-income population. We find that the system rewards variability for some individuals and penalizes it for others. We conclude that the tax and transfer system punishes and rewards variability in a manner that is both substantial and capricious.
Moffitt is a professor of economics at Brown University and Rothschild is a professor of economics at the University of California, San Diego and a researcher for the National, Bureau of Economic Research. They wish to thank Gary Chamberlain and Eugene Smolensky for helpful discussions, Peter Gottschalk for performing special tabulations for them, and the National Science Foundation and the Institute for Research on Poverty for research support. The research reported here is part of the NBER's research program in taxation. Any opinions expressed are those of the authors and not those of the NBER.
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