Using Elasticities to Derive Optimal Income Tax Rates

Emmanuel Saez

No 7628, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper derives optimal income tax formulas using compensated and uncompensated elasticities of earnings with respect to tax rates. A simple formula for the high income optimal tax rate is obtained as a function of these elasticities and the thickness of the top tail of the income distribution. In the general non-linear income tax problem, this method using elasticities shows precisely how the different economic effects come into play and which are the key relevant parameters in the optimal income tax formulas of Mirrlees. The optimal non-linear tax rate formulas are expressed in terms of elasticities and the shape of the income distribution. These formulas are implemented numerically using empirical earnings distributions and a range of realistic elasticity parameters.

JEL-codes: H21 (search for similar items in EconPapers)
Date: 2000-03
New Economics Papers: this item is included in nep-pbe, nep-pol and nep-pub
Note: PE
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Citations: View citations in EconPapers (16)

Published as Saez, Emmanuel. "Using Elasticities To Drive Optimal Income Tax Rates," Review of Economic Studies, 2001, v68(234,Jan), 205-229.

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