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The Optimal Asymptotic Income Tax Rate
Author(s) -
DAHAN MOMI,
STRAWCZYNSKI MICHEL
Publication year - 2012
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2012.01559.x
Subject(s) - economics , tax rate , optimal tax , elasticity (physics) , income elasticity of demand , econometrics , consumption (sociology) , marginal utility , microeconomics , price elasticity of demand , income distribution , inequality , monetary economics , mathematics , mathematical analysis , social science , materials science , sociology , composite material
This paper shows that a policy maker needs only two types of information to set the optimal income tax rate at the top: a measure of labor supply elasticity and the shape of skills distribution. We find that the asymptotic tax rate is not affected by the degree of inequality aversion as long as the marginal utility of consumption converges to zero. By using empirically plausible estimates for the compensated labor supply elasticity and the shape of skills distribution, we find that the optimal marginal tax rate at the top should be between 33% and 60%, which is in line with the existing rates in the real world.