Working Paper: NBER ID: w7628
Authors: Emmanuel Saez
Abstract: This paper derives optimal income tax formulas using compensated and uncompensated elasticities of earnings with respect to tax rates. A simple formula for the high income optimal tax rate is obtained as a function of these elasticities and the thickness of the top tail of the income distribution. In the general non-linear income tax problem, this method using elasticities shows precisely how the different economic effects come into play and which are the key relevant parameters in the optimal income tax formulas of Mirrlees. The optimal non-linear tax rate formulas are expressed in terms of elasticities and the shape of the income distribution. These formulas are implemented numerically using empirical earnings distributions and a range of realistic elasticity parameters.
Keywords: No keywords provided
JEL Codes: H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| elasticity parameters (C51) | optimal tax rate (H21) |
| higher elasticities (H30) | greater changes in optimal tax rates (H21) |
| income distribution shape (D31) | optimal tax rate (H21) |
| optimal tax formulas (H21) | broader applicability (C01) |