Working Paper: NBER ID: w20601
Authors: Fabian Kindermann; Dirk Krueger
Abstract: In this paper we argue that very high marginal labor income tax rates are an effective tool for social insurance even when households have preferences with high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. To make this point we construct a large scale Overlapping Generations Model with uninsurable labor productivity risk, show that it has a wealth distribution that matches the data well, and then use it to characterize fiscal policies that achieve a desired degree of redistribution in society. We find that marginal tax rates on the top 1% of the earnings distribution of close to 90% are optimal. We document that this result is robust to plausible variation in the labor supply elasticity and holds regardless of whether social welfare is measured at the steady state only or includes transitional generations.
Keywords: marginal tax rates; social insurance; income inequality
JEL Codes: E62; H21; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| very high marginal labor income tax rates (H31) | wealth distribution (D31) |
| very high marginal labor income tax rates (H31) | welfare (I38) |
| wealth distribution (D31) | social insurance (H55) |
| high marginal tax rates (H31) | improved social insurance outcomes (H55) |
| high taxes on top earners (H31) | labor supply (J20) |
| high marginal tax rates (H31) | welfare-maximizing tax rate (H21) |
| substantial welfare gains (D69) | high marginal tax rates (H31) |