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The Case for a Progressive Tax: From Basic Research to Policy Recommendations

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  • Peter Diamond
  • Emmanuel Saez

Abstract

This paper presents the case for tax progressivity based on recent results in optimal tax theory. We consider the optimal progressivity of earnings taxation and whether capital income should be taxed. We critically discuss the academic research on these topics and when and how the results can be used for policy recommendations. We argue that a result from basic research is relevant for policy only if 1) it is based on economic mechanisms that are empirically relevant and first order to the problem, 2) it is reasonably robust to changes in the modeling assumptions, and 3) the policy prescription is implementable (i.e, is socially acceptable and not too complex). We obtain three policy recommendations from basic research that satisfy these criteria reasonably well. First, very high earners should be subject to high and rising marginal tax rates on earnings. Second, low-income families should be encouraged to work with earnings subsidies, which should then be phased-out with high implicit marginal tax rates. Third, capital income should be taxed. We explain why the famous zero marginal tax rate result for the top earner in the Mirrlees model and the zero capital income tax rate results of Chamley and Judd, and Atkinson and Stiglitz are not policy relevant in our view.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.25.4.165
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File URL: http://www.aeaweb.org/jep/app/2504_Diamond_app.pdf
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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 25 (2011)
Issue (Month): 4 (Fall)
Pages: 165-90

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Handle: RePEc:aea:jecper:v:25:y:2011:i:4:p:165-90

Note: DOI: 10.1257/jep.25.4.165
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. 75%
    by Antoine Belgodere in Optimum on 2012-06-06 17:37:00
  2. Les nouvelles tranches d'imposition de François Hollande: des exemples chiffrés
    by contact@captaineconomics.fr (Le Captain') in Captain Economics on 2012-05-08 19:25:17
  3. A combien faut-il taxer les riches? La réponse de deux professeurs du MIT & Berkeley
    by contact@captaineconomics.fr (Le Captain') in Captain Economics on 2012-05-08 20:17:48
  4. The Price of Inequality: the Good, the Bad, and the Ugly
    by Jonathan Finegold in Economic Thought on 2012-12-22 16:00:07
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Hans Fehr & Fabian Kindermann, 2012. "Optimal Taxation with Current and Future Cohorts," CESifo Working Paper Series 3973, CESifo Group Munich.
  2. Ugo Colombino, 2011. "Five issues in the design of income support mechanisms. The case of Italy," CHILD Working Papers wp21_11, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  3. Tomer Blumkin & Efraim Sadka & Yotam Shem-Tov, 2012. "International Tax Competition: Zero Tax Rate at the Top Re-established," CESifo Working Paper Series 3820, CESifo Group Munich.
  4. Lukasz Rawdanowicz & Eckhard Wurzel & Ane Kathrine Christensen, 2013. "The Equity Implications of Fiscal Consolidation," OECD Economics Department Working Papers 1013, OECD Publishing.
  5. Tibor Hanappi & Sandra Müllbacher, 2012. "Tax Incentives and Family Labor Supply in Austria," NRN working papers 2012-12, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.
  6. Berliant, Marcus & Fujishima, Shota, 2012. "Optimal dynamic nonlinear income taxes: facing an uncertain future with a sluggish government," MPRA Paper 41947, University Library of Munich, Germany.
  7. Abraham, Arpad & Koehne, Sebastian & Pavoni, Nicola, 2012. "Optimal income taxation with asset accumulation," MPRA Paper 38629, University Library of Munich, Germany.
  8. Isabelle Joumard & Mauro Pisu & Debbie Bloch, 2012. "Tackling income inequality: The role of taxes and transfers," OECD Journal: Economic Studies, OECD Publishing, vol. 2012(1), pages 37-70.
  9. Bargain, Olivier & Dolls, Mathias & Immervoll, Herwig & Neumann, Dirk & Peichl, Andreas & Pestel, Nico & Siegloch, Sebastian, 2013. "Partisan Tax Policy and Income Inequality in the U.S., 1979-2007," IZA Discussion Papers 7190, Institute for the Study of Labor (IZA).
  10. Keuschnigg, Christian, 2011. "Intra- und intergenerative Gerechtigkeit in der Finanzpolitik," Economics Working Paper Series 1137, University of St. Gallen, School of Economics and Political Science.
  11. Patricia Apps & Ngo Van Long & Ray Rees, 2009. "Optimal Piecewise Linear Income Taxation," CESifo Working Paper Series 2565, CESifo Group Munich.
  12. Colombino, Ugo & Narazani, Edlira, 2012. "What's Best for Women: Gender Based Taxation, Wage Subsidies or Basic Income?," IZA Discussion Papers 6828, Institute for the Study of Labor (IZA).

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