Working Paper: NBER ID: w15071
Authors: N. Gregory Mankiw; Matthew Weinzierl; Danny Yagan
Abstract: We highlight and explain eight lessons from optimal tax theory and compare them to the last few decades of OECD tax policy. As recommended by theory, top marginal income tax rates have declined, marginal income tax schedules have flattened, redistribution has risen with income inequality, and commodity taxes are more uniform and are typically assessed on final goods. However, trends in capital taxation are mixed, and capital income tax rates remain well above the zero level recommended by theory. Moreover, some of theory's more subtle prescriptions, such as taxes that involve personal characteristics, asset-testing, and history-dependence, remain rare in practice. Where large gaps between theory and policy remain, the difficult question is whether policymakers need to learn more from theorists, or the other way around.
Keywords: Optimal Taxation; Tax Policy; Income Inequality; Redistribution
JEL Codes: H21; H24; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal marginal tax rate schedules should depend on the distribution of ability (H21) | higher marginal tax rates may be justified when few individuals are affected at the margin (H31) |
| optimal marginal tax schedule could decline at high incomes (H21) | zero top marginal tax rate may be optimal under certain conditions (H21) |
| extent of redistribution should rise with wage inequality (F62) | tax policy should adapt to changes in income distribution (H29) |
| optimal taxes should depend on personal characteristics (H21) | tagging approach that utilizes demographic factors to improve tax equity and efficiency (H23) |
| in stochastic dynamic economies, optimal tax policy requires increased sophistication (H00) | taxes should be responsive to individual income histories (H31) |