The Case for a Progressive Tax: From Basic Research to Policy Recommendations

kyann - Peter Diamond And Emmanuel Saez

Découvre YouScribe en t'inscrivant gratuitement

Je m'inscris

Obtenez un accès à la bibliothèque pour le consulter en ligne
En savoir plus

26 pages

English

Obtenez un accès à la bibliothèque pour le consulter en ligne
En savoir plus

A propos
Informations
Extrait

Description

Sujets

Journal of Economic Perspectives—Volume 25, Number 4—Fall 2011—Pages 165–190
The Case for a Progressive Tax:
From Basic Research to Policy
†Recommendations
Peter Diamond and Emmanuel Saez
hhe fair distribution of the tax burden has long been a central issue in policy-e fair distribution of the tax burden has long been a central issue in policy-
mmaking. A large academic literature has developed models of optimal tax aking. A large academic literature has developed models of optimal tax T ttheorheory to cast light on the problem of optimal tax progressivityy to cast light on the problem of optimal tax progressivity. In this . In this
paperpaper, we explore the path from basic research results in optimal tax theor, we explore the path from basic research results in optimal tax theory to y to
formulating policy recommendations.formulating policy recommendations.
Models in optimal tax theorModels in optimal tax theoryy typically posit that the tax system should maximize a typically posit that the tax system should maximize a
ssocial welfare function subject to a government budget constraint, taking into accountocial welfare function subject to a government budget constraint, taking into account
tthat individuals respond to taxes and transfers. Social welfare is larger when resourceshat individuals respond to taxes and transfers. Social welfare is larger when resources
are more equally distributed, but redistributive taxes and transfers can negativelyare more equally distributed, but redistributive taxes and transfers can negatively
affect incentives to work, save, and earn income in the faffect incentives to work, save, and earn income in the f rst place. This creates the clas-rst place. This creates the clas-
ssical trade-off between equity and effical trade-off between equity and eff ciency which is at the core of the optimal incomeciency which is at the core of the optimal income
tax problem. In general, optimal tax analyses maximize social welfare as a function oftax problem. In general, optimal tax analyses maximize social welfare as a function of
individual utilities—the sum of utilities in the utilitarian case. The marginal weight forindividual utilities—the sum of utilities in the utilitarian case. The marginal weight for
aa given person in the social welfare function measures the value of an additional dollar given person in the social welfare function measures the value of an additional dollar
oof consumption expressed in terms of public funds. Such welfare weights depend onf consumption expressed in terms of public funds. Such welfare weights depend on
tthe level of redistribution and are decreasing with income whenever society valueshe level of redistribution and are decreasing with income whenever society values
mmore equality of income. Therefore, optimal income tax theorore equality of income. Therefore, optimal income tax theoryy is f is f rrst a normativest a normative
theortheory that shows how a social welfare objective combines with constraints arising fromy that shows how a social welfare objective combines with constraints arising from
limits on resources and behavioral responses to taxation in order to derive speciflimits on resources and behavioral responses to taxation in order to derive specif c c
■ ■ Peter Diamond is Professor Emeritus of Economics, Massachusetts Institute of Tech-
nology, Cambridge Massachusetts. Emmanuel Saez is Professor of Economics, University
of California, Berkeley, California. Their e-mail addresses are 〈 pdiamond@mit.edu〉 and
〈saez@econ.berkeley.edu〉, respectively.
† There is an Appendix at the end of this article. To access an additional online Appendix, visit http://
www.aeaweb.org/articles.php?doi=10.1257/jep.25.4.165.
doi=10.1257/jep.25.4.165166 Journal of Economic Perspectives
tax policy recommendations. In addition, optimal income tax theortax policy recommendations. In addition, optimal income tax theoryy can be used to can be used to
evaluate current policies and suggest avenues for reform. Understanding what wouldevaluate current policies and suggest avenues for reform. Understanding what would
be good policybe good policy, if implemented, is a key step in making policy recommendations., if implemented, is a key step in making policy recommendations.
When done well, moving from mathematical results, theorems, or calculated When done well, moving from mathematical results, theorems, or calculated
examples to policy recommendations is a subtle process. The nature of a model is examples to policy recommendations is a subtle process. The nature of a model is
to be a limited picture of realityto be a limited picture of reality. This has two implications. First, a model may be . This has two implications. First, a model may be
good for one question and bad for anothergood for one question and bad for another, depending on the robustness of the , depending on the robustness of the
answers to the inaccuracies of the model, which will naturally varanswers to the inaccuracies of the model, which will naturally varyy with the question. with the question.
Second, tractability concerns imply that simultaneous consideration of multiple Second, tractability concerns imply that simultaneous consideration of multiple
models is appropriate since different aspects of reality can be usefully highlighted models is appropriate since different aspects of reality can be usefully highlighted
in different models; hence our reliance on trin different models; hence our reliance on trying to draw inferences simultaneously ying to draw inferences simultaneously
from multiple models.from multiple models.
In our viewIn our view, a theoretical result can be fruitfully used as part of forming a policy, a theoretical result can be fruitfully used as part of forming a policy
recommendation only if three conditions are met. First, the result should be based onrecommendation only if three conditions are met. First, the result should be based on
an economic mechanism that is empirically relevant and fan economic mechanism that is empirically relevant and f rst order to the problemrst order to the problem
at hand. Second, the result should be reasonably robust to changes in the modelingat hand. Second, the result should be reasonably robust to changes in the modeling
assumptions. In particularassumptions. In particular,, people have ver people have veryy heterogeneous tastes, and there are many heterogeneous tastes, and there are many
departures from the rational model, especially in the realm of intertemporal choice.departures from the rational model, especially in the realm of intertemporal choice.
Therefore, we should view with suspicion results that depend critically on verTherefore, we should view with suspicion results that depend critically on very strongy strong
homogeneity or rationality assumptions. Deriving optimal tax formulas as a functionhomogeneity or rationality assumptions. Deriving optimal tax formulas as a function
of a few empirically estimable “suffof a few empirically estimable “suff cient statistics” is a natural way to approach thosecient statistics” is a natural way to approach those
ff rrst two conditions. Third, the tax policy prescription needs to be implementable—st two conditions. Third, the tax policy prescription needs to be implementable—
that is, the tax policy needs to be socially acceptable and not too complex relative tothat is, the tax policy needs to be socially acceptable and not too complex relative to
the modeling of tax administration and individual responses to tax lawthe modeling of tax administration and individual responses to tax law.. By socially By socially
acceptable, we do not mean to limit the choice to currently politically plausible policyacceptable, we do not mean to limit the choice to currently politically plausible policy
options. Ratheroptions. Rather,, we mean there should not be ver we mean there should not be veryy widely held normative views that widely held normative views that
make such policies seem implausible and inappropriate at pretty much all times. Formake such policies seem implausible and inappropriate at pretty much all times. For
example, a policy prescription such as taxing height (Mankiw and Wexample, a policy prescription such as taxing height (Mankiw and Weeinzierl, 2010) isinzierl, 2010) is
obviously not socially acceptable because it violates certain horizontal equity concernsobviously not socially acceptable because it violates certain horizontal equity concerns
that do not appear in basic models. The complexity constraint can also be an issuethat do not appear in basic models. The complexity constraint can also be an issue
when optimal taxes depend in a complex way on the full historwhen optimal taxes depend in a complex way on the full history of earnings andy of earnings and
consumption, as in some recent path-breaking papers on optimal dynamic taxation.consumption, as in some recent path-breaking papers on optimal dynamic taxation.
WWee obtain three policy recommendations from basic research that we believe obtain three policy recommendations from basic research that we believe
can satisfy these three criteria reasonably well. First, vercan satisfy these three criteria reasonably well. First, very high earners should be y high earners should be
subject to high and rising marginal tax rates on earnings. In particularsubject to high and rising marginal tax rates on earnings. In particular, we discuss , we dis