Aspects of income taxation

Aspects of income taxation 313 twice as productive as a worker of type b then two workers of type b could, in principle, replace one worker of type a without any adverse output consequences. In other words, the elasticity of substitution between the two types of labor is infinite. However, there may be less than perfect substitution possibilities between different types of labor. No number of unskilled workers can, for example, replace an accomplished heart surgeon. In this case the elasticity of substitution between different types of labor is finite and the analysis of optimal taxation is somewhat different. All these issues will be considered in this chapter. We begin, however, with an analysis of optimal linear taxation as initially studied by Sandmo (1976) and later by Yaari and others.