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Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities

  • Stefanie Stantcheva

    (MIT)

  • Emmanuel Saez

    (University of California Berkeley)

  • Thomas Piketty

    (Paris School of Economics)

We then analyze top income and top tax rate data in 18 OECD countries. There is a strong correlation between cuts in top tax rates and increases in top 1% income shares since 1975, implyingthat the overall elasticity is large. But top income share increases have not translated into higher economic growth, consistent with the zero-sum bargaining model. This suggests that the first elasticity is modest in size and that the overall effect comes mostly from the third elasticity. Consequently, socially optimal top tax rates might possibly be much higher than what is commonly assumed.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 78.

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Date of creation: 2012
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Handle: RePEc:red:sed012:78
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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