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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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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. 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
  2. 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
  3. The Price of Inequality: the Good, the Bad, and the Ugly
    by Jonathan Finegold in Economic Thought on 2012-12-22 16:00:07
  4. 75%
    by Antoine Belgodere in Optimum on 2012-06-06 17:37:00
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