Peter Diamond (MIT, Department of Economics) presented The Case for a Progressive Tax: From Basic Research to Policy Recommendations at NYU yesterday as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):
This paper presents the case for tax progressivity based on recent results in optimal tax
theory.
We consider the optimal
progressivity of earnings taxation and whether capital
income should
be taxed. We critically discuss the academic research on these topics and
when and how the
results can be used for policy recommendations. We argue that a result
from basic research is
re
levant for policy only if (a) it is based on economic mechanisms
that are empirically
relevant and first order to the problem, (b) it is reasonably robust to
changes in the modeling
assumptions, (c) the policy prescription is implementable (i.e., is
social
ly acceptable and is
not too complex). We obtain three policy recommendations
from basic research that satisfy
these criteria reasonably well. First, very high earners
should be subject to high and rising
marginal tax rates on earnings. Second, low income
families should be encouraged to work
with earnings subsidies, which should then be
phased
–
out with high implicit marginal tax
rates. Third, capital income should be taxed.
We explain why the famous zero marginal tax
rate result for the top earner in the M
irrlees
model and the zero capital income tax rate results
of Chamley-Judd and Atkinson-Stiglitz
are not policy relevant in our view.
