High Marginal Tax Rates on the Top 1 Percent? Lessons from a Life-Cycle Model with Idiosyncratic Income Risk

American Economic Journal: Macroeconomics, 2022, vol. 14, issue 2, 319-66

Abstract: This paper argues that high marginal labor income tax rates on top earners are an effective tool for social insurance even when households have high labor supply elasticity, households make dynamic savings decisions, and policies have general equilibrium effects. We construct a large-scale overlapping generations model with uninsurable labor productivity risk, show that it has a realistic wealth distribution, and numerically characterize the optimal top marginal rate. We find that marginal tax rates for top 1 percent earners of 79 percent are optimal as long as the model earnings and wealth distributions display a degree of concentration as observed in US data.

JEL-codes: D15 D31 H21 H24 H55 J22 J31 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (13)

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DOI: 10.1257/mac.20150170

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