Optimal taxation and top incomes

Yuri Andrienko, Patricia Apps and Ray Rees

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: In many high-income countries over the past three decades there has been both large growth in inequality of wages and income and a shift in the burden of taxation from the top to the middle of the income distribution. A literature has developed which focuses on optimal tax rates for the top 1 % of the income distribution. In contrast, this paper considers the effect of inequality growth on the structure of a piecewise linear tax system defined over the entire income distribution. Our results suggest that the appropriate response to the increases in inequality would have been a shift towards a tax system with a lower tax rate in the lower half of the distribution together with a highly marginal rate progressive structure in the upper half, a clear differentiation between the top 10 % and the top 1 % and a higher top tax rate. Further inequality growth strengthens these characteristics of the optimal tax structure.

Date: 2016
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Citations: View citations in EconPapers (10)

Published in International Tax and Public Finance 6 23(2016): pp. 981-1003

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