Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/102654 
Year of Publication: 
2014
Series/Report no.: 
CFS Working Paper Series No. 473
Publisher: 
Goethe University Frankfurt, Center for Financial Studies (CFS), Frankfurt a. M.
Abstract: 
In this paper we argue that very high marginal labor income tax rates are an effective tool for social insurance even when households have preferences with high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. To make this point we construct a large scale Overlapping Generations Model with uninsurable labor productivity risk, show that it has a wealth distribution that matches the data well, and then use it to characterize fiscal policies that achieve a desired degree of redistribution in society. We find that marginal tax rates on the top 1% of the earnings distribution of close to 90% are optimal. We document that this result is robust to plausible variation in the labor supply elasticity and holds regardless of whether social welfare is measured at the steady state only or includes transitional generations.
Subjects: 
Progressive Taxation
Top 1%
Social Insurance
Income Inequality
JEL: 
E62
H21
H24
Document Type: 
Working Paper

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