Optimal Taxation in Theory and Practice

35 Pages Posted: 16 Jun 2009  

N. Gregory Mankiw

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Matthew Weinzierl

Harvard Business School - Business, Government and the International Economy Unit

Danny Yagan

Harvard University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: June 2009

Abstract

We highlight and explain eight lessons from optimal tax theory and compare them to the last few decades of OECD tax policy. As recommended by theory, top marginal income tax rates have declined, marginal income tax schedules have flattened, redistribution has risen with income inequality, and commodity taxes are more uniform and are typically assessed on final goods. However, trends in capital taxation are mixed, and capital income tax rates remain well above the zero level recommended by theory. Moreover, some of theory's more subtle prescriptions, such as taxes that involve personal characteristics, asset-testing, and history-dependence, remain rare in practice. Where large gaps between theory and policy remain, the difficult question is whether policymakers need to learn more from theorists, or the other way around.

Suggested Citation

Mankiw, N. Gregory and Weinzierl, Matthew and Yagan, Danny, Optimal Taxation in Theory and Practice (June 2009). NBER Working Paper No. w15071. Available at SSRN: https://ssrn.com/abstract=1418929

N. Gregory Mankiw (Contact Author)

Harvard University - Department of Economics ( email )

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Matthew Weinzierl

Harvard Business School - Business, Government and the International Economy Unit ( email )

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Danny Yagan

Harvard University - Department of Economics ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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