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Heterogeneity and Government revenues: Higher taxes at the top?

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  • Guner, Nezih
  • Lopez-Daneri, Martin
  • Ventura, Gustavo

Abstract

How effective is a more progressive tax scheme in raising revenues? We answer this question in a life-cycle economy with heterogeneity across households and endogenous labor supply. Our findings show that a tilt of the U.S. income tax schedule towards high earners leads to small increases in revenue. Maximal revenue in the long run is only 6.8% higher than in our benchmark – about 0.8% of initial GDP – while revenues from all sources increase by just about 0.6%. Our conclusions are that policy recommendations of this sort are misguided if the aim is to exclusively raise government revenue.

Suggested Citation

  • Guner, Nezih & Lopez-Daneri, Martin & Ventura, Gustavo, 2016. "Heterogeneity and Government revenues: Higher taxes at the top?," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 69-85.
  • Handle: RePEc:eee:moneco:v:80:y:2016:i:c:p:69-85
    DOI: 10.1016/j.jmoneco.2016.05.002
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    More about this item

    Keywords

    Taxation; Progressivity; Labor supply;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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