Distributional Tax Analysis in Theory and Practice: Harberger Meets Diamond-Mirrlees

Emmanuel Saez and Gabriel Zucman

No 31912, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper proposes a new framework to study the distribution of taxes and the effects of tax reforms, connecting classical tax incidence analysis to optimal tax theory. To study the distribution of current taxes, labor taxes are assigned to the corresponding workers, capital taxes to the corresponding asset owners, and consumption taxes to consumers. The tax rates are the wedges between pre-tax prices (relevant for production) and after-tax prices (relevant for the work, saving, and consumption decisions of households). In contrast to the conventional approach that shifts taxes across production factors, our approach measures actual incomes, is internally consistent, and maximizes the comparability of tax progressivity and inequality over time and across countries. Applying this methodology to the United States, we find that the effective tax rate of the top 1% has declined from about 50% in the early 1950s to 32% in 2021. It is through the corporate tax that a high degree of tax progressivity was achieved in the middle of the 20th century. To analyze the distributional effects of tax reforms, mechanical changes in tax liability by income groups and aggregate revenue effects due to household behavioral responses are sufficient statistics in neoclassical optimal tax models. The effects of taxes on pre-tax prices at the heart of classical tax incidence analysis are irrelevant. This neoclassical framework can be extended to incorporate non-standard behavioral responses uncovered by the recent empirical literature. We apply this framework by providing a distributional analysis of frequently discussed tax reforms, including replacing employer-provided health insurance contributions by a payroll tax.

JEL-codes: H20 (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-pbe and nep-pub
Note: PE
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w31912.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:31912

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w31912
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().