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  3. American Economic Journal: Macroeconomics
  4. April 2022
  5. High Marginal Tax Rates on the Top 1 Percent? Lessons from a Life-Cycle Model with Idiosyncratic Income Risk

High Marginal Tax Rates on the Top 1 Percent? Lessons from a Life-Cycle Model with Idiosyncratic Income Risk

  • Fabian Kindermann
  • Dirk Krueger
American Economic Journal: Macroeconomics
vol. 14, no. 2, April 2022
(pp. 319-66)
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Abstract

This paper argues that high marginal labor income tax rates on top earners are an effective tool for social insurance even when households have high labor supply elasticity, households make dynamic savings decisions, and policies have general equilibrium effects. We construct a large-scale overlapping generations model with uninsurable labor productivity risk, show that it has a realistic wealth distribution, and numerically characterize the optimal top marginal rate. We find that marginal tax rates for top 1 percent earners of 79 percent are optimal as long as the model earnings and wealth distributions display a degree of concentration as observed in US data.

Citation

Kindermann, Fabian, and Dirk Krueger. 2022. "High Marginal Tax Rates on the Top 1 Percent? Lessons from a Life-Cycle Model with Idiosyncratic Income Risk." American Economic Journal: Macroeconomics, 14 (2): 319-66. DOI: 10.1257/mac.20150170

Additional Materials

JEL Classification

  • D15 Intertemporal Household Choice; Life Cycle Models and Saving
  • D31 Personal Income, Wealth, and Their Distributions
  • H21 Taxation and Subsidies: Efficiency; Optimal Taxation
  • H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
  • H55 Social Security and Public Pensions
  • J22 Time Allocation and Labor Supply
  • J31 Wage Level and Structure; Wage Differentials
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