Samano, Daniel (2009): Explaining Taxes at the Upper Tail of the Income Distribution: The Role of Utility Interdependence.
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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.
|Item Type:||MPRA Paper|
|Original Title:||Explaining Taxes at the Upper Tail of the Income Distribution: The Role of Utility Interdependence|
|Keywords:||optimal non-linear taxation, relative consumption, utility interdependence, rationalization.|
|Subjects:||H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation
D - Microeconomics > D6 - Welfare Economics > D62 - Externalities
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies
|Depositing User:||Daniel Samano|
|Date Deposited:||11. Dec 2009 08:30|
|Last Modified:||15. Feb 2013 08:53|
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