Higher tax for top earners

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    Abstract

    The literature can justify increasing and decreasing marginal taxes (IMT & DMT) on top income under different social objectives and income distributions. Even if DMT are optimal, they are often politically infeasible. Then a flat tax seems to be a constrained optimal solution. We show however that, if we want to maximize the utility of a poor majority any flat tax can be inferior to some IMT. We provide a sufficient condition for (two-band) IMT to dominate any flat tax and further generalize this result to allow different welfare weights, declining elasticity of labour supply and more tax bands.
    Original languageEnglish
    Place of PublicationSt Andrews
    PublisherUniversity of St Andrews
    Number of pages25
    Publication statusPublished - Feb 2017

    Publication series

    NameSchool of Economics and Finance Discussion Paper
    PublisherUniversity of St Andrews
    No.1702
    ISSN (Print)0962-4031
    ISSN (Electronic)2055-303X

    Keywords

    • Flat tax
    • Increasing marginal taxes
    • Income redistribution

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