Optimal Marginal Tax Rates Research Articles

Опыт оценки налоговой политики на основе OLG-моделей

In the context of the renewal of the tax system in the Russian Federation from 2025, the topic of assessing the impact of changes in the taxation procedure on the well-being of various groups of the population and society as a whole has become particularly relevant. The article examines the international experience of analyzing the effects of tax policy based on OLG models of overlapping generations, taking into account the level of labor productivity of individuals, their education, wealth and life expectancy. It is shown that the transition to a progressive scale of taxation of personal income necessitates a choice between reducing social inequality and economic growth. Progressive taxation reduces the incentives for high-paid workers to work. An increase in taxes on capital does not contribute to investment and accelerate economic growth, but it can reduce social inequality if the amounts received from additional tax collections are directed to social transfers. The values of the optimal marginal tax rates on income are given, depending on the specific parameters of the chosen taxation model. Taking into account the realities of recent years, it is concluded that the burden on the budget is increasing, forcing the leadership of countries to raise taxes. However, the effectiveness of implementing this measure largely depends on the structure of the redistribution of additional tax revenues, as evidenced by most studies: if in the short term the impact on economic growth from the transition to a progressive tax system is weakly negative, the effect of changing the taxation order in the long term depends entirely on the effectiveness of the redistribution of additional budget revenues.

Optimal income taxation with tax avoidance and endogenous labour supply

AbstractI determine the optimal income tax schedule when individuals both choose endogenously their labour supply and have the possibility of avoiding paying taxes. Considering a convex concealment cost function, I propose a formula for the optimal marginal tax rate, that generalizes the formula of the standard Mirrlees model to the case of tax avoidance. I also show that the results obtained by Casamatta (2021) in the fixed income case hold true when labour supply is endogenous: with a low enough marginal cost of avoidance, it is optimal to let some taxpayers, located in the interior of the skill distribution, avoid taxes.

Tax curvature

In a Mirrleesian environment, a monopsonist sets hourly wages and individuals choose how many hours to work. Labor market outcomes do not only depend on the level and slope of the income tax function, but also on its curvature. A more concave tax schedule raises the elasticity of labor supply, which boosts wages. Consequently, optimal marginal tax rates for low-skilled workers are declining in income. I derive an optimal tax formula in terms of sufficient statistics that accounts for the impact of tax curvature on labor market outcomes. Numerical simulations suggest that optimal marginal tax rates decline rapidly at low incomes.

Optimal Income Taxation with Spillovers from Employer Learning

I study optimal income taxation when human capital investment is imperfectly observable by employers. In the model, Bayesian inference about worker productivity compresses the wage distribution, lowering the private return to human capital investment. An externality arises: given the same information, employers are more optimistic about each individual if workers are generally more productive. The significance of this externality hinges on the accuracy of employers’ beliefs and the responsiveness of human capital. For the United States, taking it into account lowers optimal marginal tax rates for most workers, reducing them by a maximum of 9–13 percentage points between $50,000 and $100,000. (JEL D83, H21, H24, J24, J31, M51, M52)

Bunching in rank-dependent optimal income tax schedules

Considering optimal non-linear income tax problems when the social welfare function only depends on ranks as in Yaari (Econometrica 55(1):95–115, 1987) and weights agreeing with the Lorenz quasi-ordering, we extend the analysis of Simula and Trannoy (Am Econ J Econ Policy, 2021) in two directions. First, we establish conditions under which bunching does not occur in the social optimum. We find a sufficient condition on individual preferences, which appears as a reinforcement of the Spence-Mirrlees condition. In particular, the marginal dis-utility of gross income should be convex, but less convex the higher the productivity. We also show that, for all productivity distributions with a log-concave survival function, bunching is precluded under the maximin, Gini, and “illfare-ranked single-series Ginis”. Second, we turn to a discrete population setting, and provide an “ABC” formula for optimal marginal tax rates, which is related to those for a continuum of types found in Simula and Trannoy (2021), but remain essentially distinct.

Optimal Income Taxation: Mirrlees Meets Ramsey

We explore the optimal shape of the income tax and transfer schedule in an environment with distinct roles for public and private insurance. In a calibration to the United States, we find that the optimal system features marginal tax rates that increase in income. When we increase pressure on the government to raise revenue, the optimal marginal tax schedule becomes first flatter and then U-shaped, reconciling various findings in the literature. A power function parametric tax schedule outperforms an affine one, indicating that tax progressivity is more important than lump-sum transfers. We also explore various social welfare objectives and Pareto-improving reforms.

How to Tax Different Incomes?

We study the optimal tax system when taxpayers earn different kinds of income by supplying different inputs. Imperfect substitution between inputs allows for general equilibrium effects. We consider any type of cross-base responses to tax changes such as income-shifting. Formalizing the tax schedule as the sum of many one-dimensional schedules, we express optimal marginal tax rate on any kind of income in terms of sufficient statistics, including new ones for cross-base responses and general equilibrium effects. We also identify the conditions under which making the personal income tax marginally more schedular is socially desirable. The comprehensive and schedular (dual, in particular) income taxes being recurring proposals in the public debate, we derive sufficient conditions under which each form of tax is optimal. We stress how empirically restrictive these conditions are. Using a new algorithm on French tax return data, we characterize the optimal combination of a nonlinear tax schedule on personal income and a linear tax rate on capital income. We find that one should include, without any deduction, all income sources in the personal income base and subsidize the source of income which is more elastic. We find that crossbase responses have little effects on the personal nonlinear income tax schedule but increases by 5.9 to 6.9 percentage points the capital tax rate. General equilibrium effects also increases this tax rate by around 4.5 percentage points.

Optimal tax problems with multidimensional heterogeneity: a mechanism design approach

We propose a new method, that we call an allocation perturbation, to derive the optimal nonlinear income tax schedules with multidimensional individual characteristics on which taxes cannot be conditioned. It is well established that, when individuals differ in terms of preferences on top of their skills, optimal marginal tax rates can be negative. In contrast, we show that with heterogeneous behavioral responses and skills, one has optimal positive marginal tax rates, under utilitarian preferences and maximin.

Higher Taxes at the Top: The Role of Entrepreneurs

This paper computes optimal top marginal tax rates in Bewley-Huggett-Aiyagari–type economies that include entrepreneurs. Consistent with the data, entrepreneurs are overrepresented at the top of the income distribution and are thus disproportionately affected by an increase in the top marginal income tax rate. The top marginal tax rate that maximizes welfare is 60 percent. While average welfare gains are positive and similar across occupations along the transition, they are larger for entrepreneurs than for workers in the long run, and this occupational gap in welfare gains after the tax increase widens with increasing income. (JEL D11, D21, D31, H21, H24, L26)

Designing, Not Checking, for Policy Robustness: An Example with Optimal Taxation

Economists typically check the robustness of their results by comparing them across plausible ranges of parameter values and model structures. A preferable approach to robustness—for the purposes of policymaking and evaluation—is to design policy that takes these ranges into account. We modify the standard optimal income tax model to include the policymaker’s subjective uncertainty over parameter values, and we characterize robust optimal policy as that which maximizes expected social welfare. After calibrating uncertainty over the elasticity of taxable income from past empirical work and novel survey data on economists’ beliefs, we compare the implied robust optimal marginal tax rates to the alternative benchmark policy based on the best point estimates of relevant parameters. Our results suggest that robust optimal marginal tax rates are typically more progressive than in benchmark analyses, raising top marginal tax rates by between 5 and 7 percentage points, and generating modest expected welfare gains. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Optimal Tax Problems with Multidimensional Heterogeneity: A Mechanism Design Approach

We propose a new method, that we call an allocation perturbation, to derive the optimal nonlinear income tax schedules with multidimensional individual characteristics on which taxes cannot be conditioned. It is well established that, when individuals differ in terms of preferences on top of their skills, optimal marginal tax rates can be negative. In contrast, we show that with heterogeneous behavioral responses and skills, one has optimal positive marginal tax rates, under utilitarian preferences and maximin.

Second-Best Source-Based Taxation of Multinational Firms

I consider a continuum of multinational enterprises (MNEs), which differ in profitability. MNEs employ capital, shift profit to tax havens and may relocate their production facilities to other countries. Source countries provide public inputs and levy taxes. I derive optimal policy choices for different government objectives (to maximize tax revenue, national income or the representative household’s utility) allowing for an unrestricted set of tax policy instruments — in contrast to most existing work on corporate taxation. With observable productivity types, source governments set type-dependent lump-sum taxes and attain the first-best allocation. With unobservable productivity types, the optimum source-based tax system consists of a small lump-sum tax (driving low-profit types out of the market) and positive marginal taxes on reported profit. Optimal marginal tax rates on capital inputs are positive if more profitable firms employ more capital. Optimal public inputs are lower than in the first best if they are of higher value to more profitable firm types. I use a sufficient statistics approach (following Saez 2001) to express optimal tax and input choices as functions of elasticities of observable choice variables. Finally, I use the model to evaluate tax policy measures, e.g. the introduction of an effective minimum tax on profits in tax havens, and to derive the welfare properties of tax competition with an unrestricted set of tax instruments.

How to Tax Different Incomes?

We study the optimal tax system when taxpayers earn different kinds of income by supplying different inputs. Imperfect substitution between inputs allows for general equilibrium effects. We consider any type of cross-base responses to tax changes such as income-shifting. Formalizing the tax schedule as the sum of many one-dimensional schedules, we express optimal marginal tax rate on any kind of income in terms of sufficient statistics, including new ones for cross-base responses and general equilibrium effects. We also identify the conditions under which making the personal income tax marginally more schedular is socially desirable. The comprehensive and schedular (dual, in particular) income taxes being recurring proposals in the public debate, we derive sufficient conditions under which each form of tax is optimal. We stress how empirically restrictive these conditions are. Using a new algorithm on French tax return data, we characterize the optimal combination of a nonlinear tax schedule on personal income and a linear tax rate on capital income. We find that one should include, without any deduction, all income sources in the personal income base and subsidize the source of income which is more elastic. We find that crossbase responses have little effects on the personal nonlinear income tax schedule but increases by 5.9 to 6.9 percentage points the capital tax rate. General equilibrium effects also increases this tax rate by around 4.5 percentage points.

Optimal Income Taxation With Tax Avoidance and Endogenous Labor Supply

We determine the optimal income tax schedule when individuals both choose endogenously their labor supply and have the possibility of avoiding paying taxes. Considering a convex concealment cost function, we propose a formula for the optimal marginal tax rate, that generalizes the standard Mirrlees formula to the case of tax avoidance. We also show that the results obtained by Casamatta (2020) in the fixed income case hold true when labor supply is endogenous: with a low enough marginal cost of avoidance, it is optimal to let some taxpayers, located in the interior of the skill distribution, avoid taxes.

Optimal Income Taxation with Present Bias

Work often entails up-front effort costs in exchange for delayed benefits, and mounting evidence documents present bias over effort in the face of such delays. This paper studies the implications for the optimal income tax. Optimal tax rates are computed for present-biased workers who choose multiple dimensions of labor effort, some of which occur prior to compensation. Present bias reduces optimal tax rates, with a larger effect when the elasticity of taxable income is high. Optimal marginal tax rates may be negative at low incomes, providing an alternative, corrective rationale for work subsidies like the Earned Income Tax Credit. (JEL D91, H21, H24)

Designing, Not Checking, for Policy Robustness: An Example with Optimal Taxation

Economists typically check the robustness of their results by comparing them across plausible ranges of parameter values and model structures. A preferable approach to robustness—for the purposes of policymaking and evaluation—is to design policy that takes these ranges into account. We modify the standard optimal income tax model to include the policymaker’s subjective uncertainty over parameter values, and we characterize robust optimal policy as that which maximizes expected social welfare. After calibrating uncertainty over the elasticity of taxable income from past empirical work and novel survey data on economists’ beliefs, we compare the implied robust optimal marginal tax rates to the alternative benchmark policy based on the best point estimates of relevant parameters. Our results suggest that robust optimal marginal tax rates are typically more progressive than in benchmark analyses, raising top marginal tax rates by between 5 and 7 percentage points, and generating modest expected welfare gains.

The Optimal Distribution of Income Revisited

This paper revisits the optimal distribution of income model in Fair (1971). This model is the same as in Mirrlees (1971) except that education is also a decision variable and tax rates are restricted to lie on a tax function. In the current paper the tax-rate restriction is relaxed. As in Fair (1971), a numerical method is used. The current method uses the DFP algorithm with numeric derivatives. Because no analytic derivatives have to be taken, it is easy to change assumptions and functional forms and run alternative experiments. Gini coefficients are computed, which provides a metric for comparing the redistributive effects under different assumptions. Ten optimal marginal tax rates are computed per experiment corresponding to ten tax brackets.The sensitivity of the results to the four main assumptions of the model are examined: 1) the form of the social welfare function that the government maximizes, 2) the form of the utility function that each individual maximizes, 3) the distribution of ability across individuals, and 4) the rate of return to education. The changes in the Gini coefficient from before-tax income to after-tax income for the experiments are compared to actual changes from various countries. Experiments using a lognormal distribution of ability match the data better than those using a lognormal distribution with a Pareto tail --- there is less actual redistribution than a Pareto tail implies. The numerical approach in this paper has advantages over the use of analytic expressions. When functional forms are changed, it may be easier to run a new numerical experiment then use an analytic expression, which can be complicated. Also, although not done in this paper, individual heterogeneity is straightforward to handle. The coding can have a different utility function for each individual. And different assumptions about education can be easily incorporated. The approach also shows the problematic nature of assuming a quasi-linear utility function --- a utility function with no income effects.

Optimal Labor Income Taxation in Poland - the Case of High Income Earners

In this paper we present solutions to the optimal taxation problem in Poland in the case of high income earners. We characterize the actual data provided by the Polish Tax Authority and show that it is thick-tailed in the upper end of the distribution. Specifically, we show that income distribution in Poland can be approximated with a Pareto distribution with parameter equal to 3:44; which makes the Saez’s formula applicable. We show that the value of the optimal marginal tax rates in Poland ranges between 16% and 60% for high income earners depending on the value of the elasticity with respect to the wage. Moreover, we show that the value of the optimal marginal tax rate for high income earners can be close 60% when one accepts - an empirically viable - relatively low value of the elasticity of labor supply with respect to the wage.

Optimal taxation under regional inequality

We study how regional productivity differences and labor mobility shape optimal Mirrleesian tax-transfer schemes. When tax schedules are not allowed to differ across regions, productivity-enhancing inter-regional migration exerts a downward pressure on optimal marginal tax rates. When regionally differentiated taxation is allowed, marginal tax rates in high- (low-)productivity regions should be corrected downwards (upwards) relative to the benchmark without migration. Simulations of the productivity differences between metropolitan and other areas of the US indicate that migration affects the optimal tax-transfer schedule more strongly in the regionally differentiated rather than in the undifferentiated case.

Practical Solutions to the Problem of Mirrlees - Optimal Labor Income Taxation in Poland

The optimal labor income taxation problem is cast in the context of the Polish economy. We use the actual Polish data on labor income and the corresponding tax revenue provided by the Polish Tax Authority to calibrate the optimal taxation Problem of Mirrlees to the Polish data. We solve the optimal taxation problem in a variety of contexts using numerical techniques. We provide solutions to the optimal labor income taxation problem, examine the sensitivity to the underlying parameters. In general, our numerical results confirm that the solutions are affected, in particular, by the elasticity of labor supply with respect to the wage, and by the preferences of policy makers. Still, in the qualitative sense the optimal marginal tax rates normally take the form of an inverted U-shaped curve when depicted in terms of income earned. We establish that the quantitative results are sensitive to the underlying parameters. In one extreme, the optimum calls for high optimal marginal tax rates reaching nearly 75% for moderate income levels when the elasticity of labor supply is low and the degree of aversion towards inequality is high. On the other hand the optimal marginal tax rates can be low for moderate income levels when the elasticity of labor supply with respect to the wage is high and when the aversion towards inequality is low. In addition, we show that marginal tax rates at low income levels can be high, which is supposed to encourage higher labor supply by low earners. Finally, our solutions reveal that universal basic income is a part of the optimum regardless of the values of the underlying parameters.