Arbeitspapier

Aggregate and distributional effects of increasing taxes on top income earners

We analyze the macroeconomic implications of increasing the top marginal income tax rate using a dynamic general equilibrium framework with heterogeneous agents and a fiscal structure resembling the actual US tax system. The wealth and income distributions generated by our model replicate the empirical ones. In two policy experiments, we increase the statutory top marginal tax rate from 35 to 70 percent and redistribute the additional tax revenue among households, either by decreasing all other marginal tax rates or by paying out a lump-sum transfer to all households. We find that increasing the top marginal tax rate decreases inequality in both wealth and income but also leads to a contraction of the aggregate economy. This is primarily driven by the negative effects that the tax change has on top income earners. The aggregate gain in welfare is sizable in both experiments mainly due to a higher degree of distributional equality.

Language
Englisch

Bibliographic citation
Series: IMFS Working Paper Series ; No. 94

Classification
Wirtschaft
Macroeconomics: Consumption; Saving; Wealth
Fiscal Policy
Taxation and Subsidies: Efficiency; Optimal Taxation
Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
Subject
Top Income Taxation
Heterogeneous Agents
Incomplete Markets
Income and Wealth Inequality

Event
Geistige Schöpfung
(who)
Brüggemann, Bettina
Yoo, Jinhyuk
Event
Veröffentlichung
(who)
Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)
(where)
Frankfurt a. M.
(when)
2015

Handle
Last update
10.03.2025, 11:44 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Brüggemann, Bettina
  • Yoo, Jinhyuk
  • Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)

Time of origin

  • 2015

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