1932

Abstract

This article addresses the modern optimal tax progressivity literature, which clarifies the key role of the behavioral response to taxation and accounts for the incomes of the superrich being qualitatively different from others. Some of the superrich may be “superstars” for whom small differences in talent are magnified into much larger earnings differences, while others may work in winner-take-all markets, such that their effort to climb the ladder of success reduces the returns to others. We stress that pivotal tax-rate elasticities are not structural parameters and will be smaller the broader and less plastic is the tax base and the more effective is the enforcement of tax evasion. For this reason, normative analysis of tax rates should be accompanied by attention to the tax base, with a special focus on capital gains, which comprise a large fraction of the taxable income of the superrich.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-economics-081919-115106
2020-08-02
2024-10-14
Loading full text...

Full text loading...

/deliver/fulltext/economics/12/1/annurev-economics-081919-115106.html?itemId=/content/journals/10.1146/annurev-economics-081919-115106&mimeType=html&fmt=ahah

Literature Cited

  1. Ales L, Bellofatto A, Wang J 2017. Taxing atlas: executive compensation, firm size, and their impact on optimal top income tax rates. Rev. Econ. Dyn. 26:62–90
    [Google Scholar]
  2. Ales L, Kurnaz M, Sleet C 2015. Technical change, wage inequality and taxation. Am. Econ. Rev. 105:3061–101
    [Google Scholar]
  3. Ales L, Sleet C 2016. Taxing top CEO incomes. Am. Econ. Rev. 106:3331–66
    [Google Scholar]
  4. Alstadsæter A, Johannesen N, Zucman G 2019. Tax evasion and inequality. Am. Econ. Rev. 109:2073–103
    [Google Scholar]
  5. Auten G, Gee G 2009. Income mobility in the United States: new evidence from income tax data. Natl. Tax J. 62:301–28
    [Google Scholar]
  6. Auten G, Gee G, Turner N 2013. New perspectives on income mobility and inequality. Natl. Tax J. 66:893–912
    [Google Scholar]
  7. Autor D, Levy F, Murnane R 2003. The skill content of recent technological change: an empirical exploration. Q. J. Econ. 118:1279–333
    [Google Scholar]
  8. Badel A, Huggett M, Luo W 2019. Taxing top earners: a human capital perspective Work. Pap., Georgetown Univ., Washington, DC
    [Google Scholar]
  9. Bailey M 1969. Capital gains and income taxation. The Taxation of Income from Capital ed. A Harberger, M Bailey 11–49 Washington, DC: Brookings Inst. Press
    [Google Scholar]
  10. Bakija J, Cole A, Heim BT 2012. Jobs and income growth of top earners and the causes of changing income inequality: evidence from US tax return data Work. Pap., Williams Coll. Williamstown, MA:
    [Google Scholar]
  11. Banks S, Diamond P 2010. The base for direct taxation. Dimensions of Tax Design: The Mirrlees Review ed. J Mirrlees, S Adam, T Besley, R Blundell, S Bond, et al. 548–648 New York: Oxford Univ. Press
    [Google Scholar]
  12. Bartels L 2016. Unequal Democracy: The Political Economy of the New Gilded Age Princeton, NJ: Princeton Univ. Press
    [Google Scholar]
  13. Bertrand M, Mullainathan S 2001. Are CEOs rewarded for luck?. Q. J. Econ. 116:901–32
    [Google Scholar]
  14. Besley T, Ghatak M 2013. Bailouts and the optimal taxation of bonus pay. Am. Econ. Rev. Pap. Proc. 103:163–67
    [Google Scholar]
  15. Bloomberg 2019. Bloomberg Billionaires Index: methodology. Bloomberg. https://www.bloomberg.com/billionaires/methodology/
    [Google Scholar]
  16. Bourne J, Steuerle E, Raub B, Newcomb J, Steele E 2018. More than they realize: the income of the wealthy. Natl. Tax J. 71:335–56
    [Google Scholar]
  17. Brock W, Magee S 1984. The invisible foot and the waste of nations. Neoclassical Political Economy: The Analysis of Rent-Seeking and DUP Activities ed. D Colander 177–86 Pensacola, FL: Ballinger
    [Google Scholar]
  18. Brülhart M, Gruber J, Krapf M, Schmidheiny K 2019. Behavioral responses to wealth taxes: evidence from Switzerland CEPR Discuss. Pap. 14054 (v. 2), Cent. Econ. Policy Res. London:
    [Google Scholar]
  19. Costinot A, Werning I 2018. Robots, trade, and Luddism: a sufficient statistic approach to optimal technology regulation NBER Work. Pap. 25103
    [Google Scholar]
  20. Cullen J, Gordon R 2007. Taxes and entrepreneurial risk-taking: theory and evidence for the U.S.. J. Public Econ. 9:1479–505
    [Google Scholar]
  21. Denk O 2015. Who are the top 1% earners in Europe? OECD Econ. Dep. Work. Pap. 1274, Organ. Econ. Coop. Dev. Paris:
    [Google Scholar]
  22. Diamond P 1998. Optimal income taxation: an example with a U-shaped pattern of optimal marginal tax rates. Am. Econ. Rev. 88:83–95
    [Google Scholar]
  23. Diamond P, Saez E 2011. The case for a progressive tax: from basic research to policy recommendations. J. Econ. Perspect. 25:165–90
    [Google Scholar]
  24. Dolan K 2018. Forbes 400 2018: a new number one and a record-breaking year for America's richest people. Forbes https://www.forbes.com/sites/kerryadolan/2018/10/03/forbes-400-2018-a-new-number-one-and-a-record-breaking-year-for-americas-richest-people/#7e332f4560b7
    [Google Scholar]
  25. Durán-Cabé J, Esteller-Moré A, Mas-Montserrat M 2017. Behavioral responses to the (re)introduction of wealth taxes: evidence from Spain Work. Pap., Univ. Barcelona Barcelona, Spain:
    [Google Scholar]
  26. Economist 2019. How to tax the rich. The Economist https://www.economist.com/leaders/2019/02/02/how-to-tax-the-rich
    [Google Scholar]
  27. Ernst & Young Glob. Ltd 2018. Worldwide Estate and Inheritance Tax Guide 2018 London: Ernst & Young Glob. Ltd https://www.ey.com/Publication/vwLUAssets/ey-worldwide-estate-and-inheritance-tax-guide-2018/$FILE/ey-worldwide-estate-and-inheritance-tax-guide-2018.pdf
    [Google Scholar]
  28. Fagereng A, Guiso L, Malacrino D, Pistaferri L 2016. Heterogeneity and persistence in returns to wealth NBER Work. Pap. 22822
    [Google Scholar]
  29. Farhi E, Gabaix X 2020. Optimal taxation with behavioral agents. Am. Econ. Rev. 110:298336
    [Google Scholar]
  30. Farhi E, Sleet C, Werning I, Yeltekin S 2012. Non-linear capital taxation without commitment. Rev. Econ. Stud. 79:1469–93
    [Google Scholar]
  31. Farhi E, Werning I 2010. Progressive estate taxation. Q. J. Econ. 125:635–73
    [Google Scholar]
  32. Farhi E, Werning I 2013. Estate taxation with altruism heterogeneity. Am. Econ. Rev. Pap. Proc. 103:489–95
    [Google Scholar]
  33. Feldstein M 1999. Tax avoidance and the deadweight loss of the income tax. Rev. Econ. Stat. 81:674–80
    [Google Scholar]
  34. Fleischer V 2015. Alpha: Labor is the new capital Paper presented at the Ostrom Workshop, Indiana Univ. Bloomington Bloomington: https://ostromworkshop.indiana.edu/pdf/seriespapers/2015f_c/fleischerpaper.pdf
    [Google Scholar]
  35. Frank R 1999. Luxury Fever: Money and Happiness in an Era of Excess New York: Free Press
    [Google Scholar]
  36. Frank R 2016. Success and Luck: Good Fortune and the Myth of Meritocracy Princeton, NJ: Princeton Univ. Press
    [Google Scholar]
  37. Gabaix X, Landier A 2008. Why has CEO pay increased so much?. Q. J. Econ. 123:49–100
    [Google Scholar]
  38. Garicano L, Rossi-Hansberg E 2015. Knowledge-based hierarchies: using organizations to understand the economy. Annu. Rev. Econ. 7:1–30
    [Google Scholar]
  39. Gilens M 2014. Affluence and Influence: Economic Inequality and Political Power in America Princeton, NJ: Princeton Univ. Press
    [Google Scholar]
  40. Goldin C, Katz L 1998. The origins of technology-skill complementarity. Q. J. Econ. 113:693–732
    [Google Scholar]
  41. Golosov M, Tsyvinski A, Werning I 2007. New dynamic public finance: a user's guide. NBER Macroecon. Annu. 2006 21:317–88
    [Google Scholar]
  42. Goolsbee A 1999. Evidence on the high-income Laffer curve from six decades of tax reform. Brookings Pap. Econ. Act. 2:1–64
    [Google Scholar]
  43. Goolsbee A 2000. What happens when you tax the rich? Evidence from executive compensation. J. Political Econ. 108:352–78
    [Google Scholar]
  44. Gruber J, Saez E 2002. The elasticity of taxable income: evidence and implications. J. Public Econ. 84:1–32
    [Google Scholar]
  45. Guvenen F, Kambourov G, Kuruscu B, Ocampo S, Chen D 2019. Use it or lose it: efficiency gains from wealth taxation Work. Pap., Univ. Minn., Minneapolis
    [Google Scholar]
  46. Guvenen F, Kaplan G 2017. Top income inequality in the 21st century: some cautionary notes NBER Work. Pap. 23321
    [Google Scholar]
  47. Hamermesh D, Slemrod J 2008. The economics of workaholism: We should not have worked on this paper. B.E. J. Econ. Anal. Policy 8:1–30
    [Google Scholar]
  48. IRS (Int. Revenue Serv.) 2016. SOI Tax Stats—Individual Income Tax Returns Publication 1304 Rep., Int. Revenue Serv., Washington, DC
    [Google Scholar]
  49. Jakobsen K, Jakobsen K, Kleven H, Zucman G 2020. Wealth taxation and wealth accumulation: theory and evidence from Denmark. Q. J. Econ. 135:32988
    [Google Scholar]
  50. Jaravel X, Olivi A 2019. Optimal taxation with market size effects Work. Pap., London Sch. Econ., London
    [Google Scholar]
  51. Johns A, Slemrod J 2010. The distribution of income tax noncompliance. Natl. Tax J. 63:397–418
    [Google Scholar]
  52. Jones C 2019. Taxing top incomes in a world of ideas NBER Work. Pap. 25725
    [Google Scholar]
  53. Judd K 1985. Redistributive taxation in a simple perfect foresight model. J. Public Econ. 28:59–83
    [Google Scholar]
  54. Kapicka M, Slavik C 2019. Organization of knowledge and taxation 2019 Meet. Pap., Soc. Econ. Dyn., Minneapolis, MN
    [Google Scholar]
  55. Kaplan S, Rauh J 2013. It's the market: the broad-based rise in the return to top talent. J. Econ. Perspect. 27:35–56
    [Google Scholar]
  56. Keane M 2011. Labor supply and taxes: a survey. J. Econ. Lit. 49:961–1075
    [Google Scholar]
  57. Keen M, Slemrod J 2017. Optimal tax administration. J. Public Econ. 152:133–42
    [Google Scholar]
  58. Kindermann F, Krueger D 2014. High marginal tax rates on the top 1%? Lessons from a lifecycle model with idiosyncratic income risk NBER Work. Pap. 20601
    [Google Scholar]
  59. Kleven H, Landais C, Munoz M, Stantcheva S 2019. Taxation and migration: evidence and policy implications NBER Work. Pap. 25740
    [Google Scholar]
  60. Koenig F 2019. Superstar effects and market size: evidence from the roll-out of television Work. Pap., London Sch. Econ. London:
    [Google Scholar]
  61. Kopczuk W 2013. Taxation of intergenerational transfers and wealth. Handbook of Public Economics Vol. 5, ed. A Auerbach, R Chetty, M Feldstein, E Saez 329–90 Amsterdam: Elsevier
    [Google Scholar]
  62. Krueger AB 2019. Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us About Economics and Life New York: Currency
    [Google Scholar]
  63. Lawson N 2019. Taxing the job creators: efficient taxation with bargaining in hierarchical firms. Labour Econ. 56:1–25
    [Google Scholar]
  64. Lockwood B, Nathanson C, Weyl G 2017. Taxation and the allocation of talent. J. Political Econ. 125:1635–82
    [Google Scholar]
  65. [Google Scholar]
  66. Mirrlees J 1971. An exploration in the theory of optimum income taxation. Rev. Econ. Stud. 38:175–208
    [Google Scholar]
  67. OECD (Organ. Econ. Coop. Dev.) 2018a. Table I.7. Top statutory personal income tax rate and top marginal tax rates for employees OECD Tax Database https://stats.oecd.org/index.aspx?DataSetCode
    [Google Scholar]
  68. OECD (Organ. Econ. Coop. Dev.) 2018b. Table II.4. Overall statutory tax rates on dividend income OECD Tax Database https://stats.oecd.org/index.aspx?DataSetCode
    [Google Scholar]
  69. OECD (Organ. Econ. Coop. Dev.) 2018c. The role and design of net wealth taxes in the OECD OECD Tax Policy Stud. OECD, Paris: https://doi.org/10.1787/9789264290303-en
    [Crossref] [Google Scholar]
  70. Oswald A 1983. Altruism, jealousy and the theory of optimal non-linear taxation. J. Public Econ. 20:77–87
    [Google Scholar]
  71. Pareto V 1896. La courbe de la répartition de la richesse Lausanne, Switz.: Impr. Ch. Viret-Genton
    [Google Scholar]
  72. Persson T, Tabellini G 1994. Is inequality harmful for growth?. Am. Econ. Rev. 84:600–21
    [Google Scholar]
  73. Phelps E 1973. Taxation of wage income for economic justice. Q. J. Econ. 87:331–54
    [Google Scholar]
  74. Piketty T 2014. Capital in the Twenty-First Century Cambridge, MA: Harvard Univ. Press
    [Google Scholar]
  75. Piketty T, Saez E 2013. A theory of optimal inheritance taxation. Econometrica 81:1851–86
    [Google Scholar]
  76. Piketty T, Saez E, Stantcheva S 2014. Optimal taxation of top labor incomes: a tale of three elasticities. Am. Econ. J. Econ. Policy 6:230–71
    [Google Scholar]
  77. Rattner S 2019. A better way to tax the rich. New York Times https://www.nytimes.com/2019/01/28/opinion/aoc-wealth-tax.html
    [Google Scholar]
  78. Rosen S 1981. The economics of superstars. Am. Econ. Rev. 71:845–58
    [Google Scholar]
  79. Rothschild C, Scheuer F 2013. Redistributive taxation in the Roy model. Q. J. Econ. 128:623–68
    [Google Scholar]
  80. Rothschild C, Scheuer F 2014. A theory of income taxation under multidimensional skill heterogeneity NBER Work. Pap. 19822
    [Google Scholar]
  81. Rothschild C, Scheuer F 2016. Optimal taxation with rent-seeking. Rev. Econ. Stud. 83:1225–62
    [Google Scholar]
  82. Sachs D, Tsyvinski A, Werquin N 2020. Nonlinear tax incidence and optimal taxation in general equilibrium. Econometrica 88:46993
    [Google Scholar]
  83. Sadka E 1976. Income distribution, incentive effects and optimal income taxation. Rev. Econ. Stud. 43:261–67
    [Google Scholar]
  84. Saez E 2001. Using elasticities to derive optimal income tax rates. Rev. Econ. Stud. 68:205–29
    [Google Scholar]
  85. Saez E 2017. Taxing the rich more: preliminary evidence from the 2013 tax increase. Tax Policy Econ. 31:71–120
    [Google Scholar]
  86. Saez E, Slemrod J, Giertz S 2012. The elasticity of taxable income with respect to marginal tax rates: a critical review. J. Econ. Perspect. 50:3–50
    [Google Scholar]
  87. Saez E, Zucman G 2016. Wealth inequality in the United States since 1913: evidence from capitalized income tax data. Q. J. Econ. 131:519–78
    [Google Scholar]
  88. Saez E, Zucman G 2019. Progressive wealth taxation. Brookings Pap. Econ. Act. In press
    [Google Scholar]
  89. Scheuer F 2013. Adverse selection in credit markets and regressive profit taxation. J. Econ. Theory 148:1333–60
    [Google Scholar]
  90. Scheuer F 2014. Entrepreneurial taxation with endogenous entry. Am. Econ. J. Econ. Policy 6:126–63
    [Google Scholar]
  91. Scheuer F, Slemrod J 2019. Taxing our wealth Work. Pap., Univ. Mich. Ann Arbor:
    [Google Scholar]
  92. Scheuer F, Werning I 2016. Mirrlees meets Diamond-Mirrlees NBER Work. Pap. 22076
    [Google Scholar]
  93. Scheuer F, Werning I 2017. The taxation of superstars. Q. J. Econ. 132:211–70
    [Google Scholar]
  94. Scheuer F, Wolitzky A 2016. Capital taxation under political constraints. Am. Econ. Rev. 106:2304–28
    [Google Scholar]
  95. Seade J 1977. On the shape of optimal tax schedules. J. Public Econ. 7:203–35
    [Google Scholar]
  96. Seim D 2017. Behavioral responses to wealth taxes: evidence from Sweden. Am. Econ. J. Econ. Policy 9:395–421
    [Google Scholar]
  97. Simons H 1938. Personal Income Taxation Chicago: Univ. Chicago Press
    [Google Scholar]
  98. Slavik C, Yazici H 2014. Machines, buildings, and optimal dynamic taxes. J. Monet. Econ. 66:47–61
    [Google Scholar]
  99. Slemrod J 1992. Taxation and inequality: a time-exposure perspective. Tax Policy Econ. 6:105–27
    [Google Scholar]
  100. Slemrod J, Kopczuk W 2002. The optimal elasticity of taxable income. J. Public Econ. 84:91–112
    [Google Scholar]
  101. Smith M, Yagan D, Zidar O, Zwick E 2019. Capitalists in the twenty-first century. Q. J. Econ. 134:1675–745
    [Google Scholar]
  102. Steuerle E 1985. Wealth, realized income, and the measure of well-being. Horizontal Equity, Uncertainty, and Economic Well-Being ed. M David, T Smeeding 91–124 Chicago: Univ. Chicago Press
    [Google Scholar]
  103. Stiglitz J 1982. Self-selection and Pareto efficient taxation. J. Public Econ. 17:213–40
    [Google Scholar]
  104. Straub L, Werning I 2020. Positive long-run capital taxation: Chamley-Judd revisited. Am. Econ. Rev. 110:86119
    [Google Scholar]
  105. Terviö M 2008. The difference that CEOs make: an assignment model approach. Am. Econ. Rev. 98:642–68
    [Google Scholar]
  106. Thümmel U 2018. Optimal taxation of robots CESifo Work. Pap. 7317 CESifo, Munich, Ger.:
    [Google Scholar]
  107. Tsyvinski A, Werquin N 2017. Generalized compensation principle NBER Work. Pap. 23509
    [Google Scholar]
  108. Varian H 1980. Redistributive taxation as social insurance. J. Public Econ. 14:49–68
    [Google Scholar]
  109. Werning I 2007. Pareto efficient income taxation Work. Pap., Mass. Inst. Technol. Cambridge, MA:
    [Google Scholar]
/content/journals/10.1146/annurev-economics-081919-115106
Loading
/content/journals/10.1146/annurev-economics-081919-115106
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error