Explaining taxes at the upper tail of the income distribution: The role of utility interdependence

Arbeitspapier

Optimal tax theory has diffculty 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 quantities 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 sufficient for this. My estimations indicate that the progressivity of tax schedules may be driven by corrective considerations.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Papers ; No. 2009-16

Classification and Topics

• Classification: Wirtschaft ; Externalities ; Taxation and Subsidies: Efficiency; Optimal Taxation ; Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
• Subject: optimal non-linear taxation ; relative consumption ; rationalization

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Sámano, Daniel
• Event: Veröffentlichung
• (who): Banco de México
• (where): Ciudad de México
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/83716
• Last update: 10.03.2025, 11:44 AM CET