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The Optimal Asymptotic Income Tax Rate

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  • MOMI DAHAN
  • MICHEL STRAWCZYNSKI

Abstract

Recent works on optimal income tax found that for unbounded distributions of earnings the optimal tax rate at the top is relatively high (around 60 percent). This finding is puzzling in light of the well-known result for bounded distributions of a zero optimal tax rate at the top. Our paper shows that the more recent papers have used assumptions that favor a high asymptotic tax rate: Pareto instead of Log-normal distribution and linear instead of non-linear utility of consumption. Using these two assumptions along with a logarithmic utility of leisure leads to an optimal rate of 100%, a result that is avoided in recent literature by assuming a constant compensated elasticity of labor. We find that even when using a Pareto distribution of earnings the optimal asymptotic tax rate is about a half compared to recent literature.
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Suggested Citation

  • Momi Dahan & Michel Strawczynski, 2012. "The Optimal Asymptotic Income Tax Rate," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 14(5), pages 737-755, October.
    • Handle: RePEc:bla:jpbect:v:14:y:2012:i:5:p:737-755
    DOI: j.1467-9779.2012.01559.x
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    File URL: http://hdl.handle.net/10.1111/j.1467-9779.2012.01559.x
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    Cited by:

    1. Ravi Kanbur & Matti Tuomala, 2025. "How does predistribution affect redistribution?," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 23(4), pages 1057-1075, December.
    2. Louis Kaplow, 2024. "Optimal Income Taxation," Journal of Economic Literature, American Economic Association, vol. 62(2), pages 637-738, June.
    3. Louis Kaplow, 2022. "Optimal Income Taxation," NBER Working Papers 30199, National Bureau of Economic Research, Inc.
    4. Michel Strawczynski, 2020. "Optimal EITC in the Presence of Cultural Barriers for Labor Market Participation," Journal of Labor Research, Springer, vol. 41(3), pages 233-259, September.
    5. Boadway, Robin & Jacquet, Laurence, 2008. "Optimal marginal and average income taxation under maximin," Journal of Economic Theory, Elsevier, vol. 143(1), pages 425-441, November.

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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