Working Paper: NBER ID: w29582
Authors: Antoine Ferey; Benjamin Lockwood; Dmitry Taubinsky
Abstract: This paper provides general and empirically implementable sufficient statistics formulas for optimal nonlinear tax systems in the presence of across-income heterogeneity in preferences, inheritances, income-shifting capabilities, and other sources. We study unrestricted tax systems on income and savings (or other commodities) that implement the optimal direct-revelation mechanism, as well as simpler tax systems that impose common restrictions like separability between earnings and savings taxes. We characterize the optimum using familiar elasticity concepts and a sufficient statistic for general across-income heterogeneity: the difference between the cross-sectional variation of savings with income, and the causal effect of income on savings. The Atkinson-Stiglitz Theorem is a knife-edge case corresponding to zero difference, and a number of other key results in optimal tax theory are subsumed as special cases. We provide tractable extensions of these results that include multidimensional heterogeneity, additional efficiency rationales for taxing heterogeneous returns, and corrective motives to encourage more saving. Applying these formulas in a calibrated model of the U.S. economy, we find that the optimal savings tax is positive and progressive.
Keywords: Optimal Taxation; Nonlinear Tax Systems; Income Heterogeneity
JEL Codes: D61; H21; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal savings tax design (H21) | individual saving behaviors (D14) |
| income changes (D31) | savings behavior (D14) |
| sufficient statistic for across-income heterogeneity (C46) | optimal savings tax rate (H21) |
| higher ability types (C12) | savings behavior (D14) |
| optimal tax policy (H21) | optimal tax rates (H21) |
| elasticity of savings with respect to tax rates (H31) | optimal tax policy (H21) |