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

Fabian Kindermann and Dirk Krueger

No 20601, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we argue that very high marginal labor income tax rates are an effective tool for social insurance even when households have preferences with high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. To make this point we construct a large scale Overlapping Generations Model with uninsurable labor productivity risk, show that it has a wealth distribution that matches the data well, and then use it to characterize fiscal policies that achieve a desired degree of redistribution in society. We find that marginal tax rates on the top 1% of the earnings distribution of close to 90% are optimal. We document that this result is robust to plausible variation in the labor supply elasticity and holds regardless of whether social welfare is measured at the steady state only or includes transitional generations.

JEL-codes: E62 H21 H24 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-dge, nep-ias, nep-mac and nep-pub
Note: EFG PE POL
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Citations: View citations in EconPapers (57)

Published as Fabian Kindermann & Dirk Krueger, 2022. "High Marginal Tax Rates on the Top 1 Percent? Lessons from a Life-Cycle Model with Idiosyncratic Income Risk," American Economic Journal: Macroeconomics, vol 14(2), pages 319-366.

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Working Paper: High Marginal Tax Rates on the Top 1%? Lessons from a Life Cycle Model with Idiosyncratic Income Risk (2014)
Working Paper: High Marginal Tax Rates on the Top 1%? Lessons from a Life Cycle Model with Idiosyncratic Income Risk (2014)
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