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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

Abstract: 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)
Date: 2009-12-08
New Economics Papers: this item is included in nep-pub
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Working Paper: Explaining Taxes at the Upper Tail of the Income Distribution: The Role of Utility Interdependence (2009) Downloads
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