Abstract:

To purchase or authenticate to the full-text of this article, please visit this link: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9779.2012.01559.x/abst... Byline: MOMI DAHAN(1), MICHEL STRAWCZYNSKI(2) Abstract This paper shows that a policy maker needs only two types of information to set the optimal income tax rate at the top: a measure of labor supply elasticity and the shape of skills distribution. We find that the asymptotic tax rate is not affected by the degree of inequality aversion as long as the marginal utility of consumption converges to zero. By using empirically plausible estimates for the compensated labor supply elasticity and the shape of skills distribution, we find that the optimal marginal tax rate at the top should be between 33% and 60%, which is in line with the existing rates in the real world. Author Affiliation: (1)Hebrew University of Jerusalem, School of Public Policy (2)Hebrew University of Jerusalem, School of Public Policy Article Note: Momi Dahan