The Optimal Asymptotic Income Tax Rate

Momi Dahan*, Michel Strawczynski

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

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.

Original languageAmerican English
Pages (from-to)737-755
Number of pages19
JournalJournal of Public Economic Theory
Volume14
Issue number5
DOIs
StatePublished - Oct 2012

Bibliographical note

Published previously as discussion paper in:
Discussion paper series
vol. no. 2004.15
Bank Yisrael. Mahleket ha-mehkar
33 pages

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