Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/116771
Authors: 
Brüggemann, Bettina
Yoo, Jinhyuk
Year of Publication: 
2015
Series/Report no.: 
SAFE Working Paper Series 113
Abstract: 
We analyze the macroeconomic implications of increasing the top marginal income tax rate using a dynamic general equilibrium framework with heterogeneous agents and a fiscal structure resembling the actual U.S. tax system. The wealth and income distributions generated by our model replicate the empirical ones. In two policy experiments, we increase the statutory top marginal tax rate from 35 to 70 percent and redistribute the additional tax revenue among households, either by decreasing all other marginal tax rates or by paying out a lump-sum transfer to all households. We find that increasing the top marginal tax rate decreases inequality in both wealth and income but also leads to a contraction of the aggregate economy. This is primarily driven by the negative effects that the tax change has on top income earners. The aggregate gain in welfare is sizable in both experiments mainly due to a higher degree of distributional equality.
Subjects: 
Top Income Taxation
Heterogeneous Agents
Incomplete Markets
Income and Wealth Inequality
JEL: 
E21
E62
H21
H24
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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