From Optimal Tax Theory to Applied Tax Policy

This paper aims to provide a perspective on the ideal tax system using insights from optimaltax theory supplemented with empirical evidence. These insights are applied to actual policy questions regarding the progressiveness of the labor income tax, in-work tax credits, the design of the capital income tax, the taxation of housing and pensions, the role of indirect taxes, optimal environmental taxes, and corrective taxes on alcohol and tobacco. Bas Jacobs Erasmus School of Economics Erasmus University Rotterdam Rotterdam / The Netherlands [email protected] Large parts of this paper are based on a policy paper I have written for the Dutch Ministry of Finance (Jacobs, 2010). This paper has been presented at the The Research Forum on Taxation ‘Skatteforum’ in Moss, Norway, June 7-8, 2011. I thank the participants, and in particular Agnar Sandmo and Dirk Schindler, for their comments and suggestions. Moreover, I am grateful to Alfons Weichenrieder and two anonymous referees for detailed comments and suggestions, which greatly helped me to improve the paper. The usual disclaimer applies.