An Optimal Shape of Income Tax: Evidence from Zero Income Tax Countries - Paraguay & Uruguay
Most of the existing literature on the optimal shape of income tax has a common result - decreasing marginal tax rates. This result stands in sharp contrast with real world income tax systems that are characterized by increasing marginal tax rates. Diamond (1998) made explicit the factors that affect the optimal shape of income tax rates. A special attention was given to one of the effects: the distribution effect. The main goal of this paper is to empirically explore whether the 'distribution effect' implies rising or declining marginal income tax rates with special interest at high levels of income. We estimate the hourly wage distribution as a proxy for the distribution of skills. We show that the desired income tax schedule implied by the 'distribution effect' should exhibit increasing marginal tax rates at high levels of income. The analysis is based on data from zero income tax countries - Paraguay and Uruguay. We use a nonparametric estimation technique to avoid using any functional form assumptions on the skill distribution.
|Date of creation:||2003|
|Contact details of provider:|| Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097|
Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/
When requesting a correction, please mention this item's handle: RePEc:duk:dukeec:03-05. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Department of Economics Webmaster)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.