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A Fair Day's Pay for a Fair Day's Work: Optimal Tax Design as Redistributional Arbitrage

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Abstract

We study optimal tax design based on the idea that policy-makers face trade-offs between multiple margins of redistribution. Within a Mirrleesian economy with earnings, consumption and retirement savings, we derive a novel formula for optimal income and savings distortions based on redistributional arbitrage. We establish a sufficient statistics representation of the labor income and capital tax rates on top income earners in dynamic environments, which relies on the observed distributions of both income and consumption. Because consumption has a thinner Pareto tail than income, our quantitative results suggest that it is optimal to shift a substantial fraction of the top earners' tax burden from income to savings.

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  • Christian Hellwig & Nicolas Werquin, 2022. "A Fair Day's Pay for a Fair Day's Work: Optimal Tax Design as Redistributional Arbitrage," Working Paper Series WP 2022-03, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:93617
    DOI: 10.21033/wp-2022-03
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    Cited by:

    1. Antoine Ferey & Benjamin Lockwood & Dmitry Taubinsky, 2021. "Sufficient Statistics for Nonlinear Tax Systems with General Across-Income Heterogeneity," NBER Working Papers 29582, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Capital Taxation; Income Taxation; Consumption Inequality;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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