Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83716
Authors: 
Sámano, Daniel
Year of Publication: 
2009
Series/Report no.: 
Working Papers, Banco de México 2009-16
Abstract: 
Optimal tax theory has diffculty rationalizing high marginal tax rates at the upper end of the income distribution. In this paper, I construct a model of optimal income taxation in which agents' preferences are interdependent. I derive a simple expression for optimal taxes that accommodates consumption externalities within Mirrlees (1971) framework. Using this expression, I conduct a positive analysis of taxation: assuming that observed taxes are optimal, I derive analytic expressions for i) a parameter that measures the degree of agents' utility interdependence and ii) a function that quantities the consumption externality agents of different income impose to society. Using these expressions, I rationalize income taxes in the United States and the United Kingdom for the 1995-2004 period. I show that only a moderate amount of utility interdependence is sufficient for this. My estimations indicate that the progressivity of tax schedules may be driven by corrective considerations.
Subjects: 
optimal non-linear taxation
relative consumption
rationalization
JEL: 
D62
H21
H23
Document Type: 
Working Paper
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