Explaining Taxes at the Upper Tail of the Income Distribution: The Role of Utility Interdependence
Daniel Samano ()
MPRA Paper from University Library of Munich, Germany
Optimal tax theory has difficulty rationalizing high marginal tax rates at the upper end of the income distribution. In this paper, I construct a model of optimal income taxation in which agents' preferences are interdependent. I derive a simple expression for optimal taxes that accommodates consumption externalities within Mirrlees (1971) framework. Using this expression, I conduct a positive analysis of taxation: assuming that observed taxes are optimal, I derive analytic expressions for i) a parameter that measures the degree of agents' utility interdependence and ii) a function that quantifies the consumption externality agents of different income impose to society. Using these expressions, I rationalize income taxes in the United States and the United Kingdom for the 1995-2004 period. I show that only a moderate amount of utility interdependence is su±cient for this. My estimations indicate that the progressivity of tax schedules may be driven by corrective considerations.
Keywords: optimal non-linear taxation; relative consumption; utility interdependence; rationalization. (search for similar items in EconPapers)
JEL-codes: H21 D62 H23 (search for similar items in EconPapers)
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Working Paper: Explaining Taxes at the Upper Tail of the Income Distribution: The Role of Utility Interdependence (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:19112
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