Using Elasticities to Derive Optimal Income Tax Rates

44 Pages Posted: 17 May 2000 Last revised: 6 Nov 2022

See all articles by Emmanuel Saez

Emmanuel Saez

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 2000

Abstract

This paper derives optimal income tax formulas using compensated and uncompensated elasticities of earnings with respect to tax rates. A simple formula for the high income optimal tax rate is obtained as a function of these elasticities and the thickness of the top tail of the income distribution. In the general non-linear income tax problem, this method using elasticities shows precisely how the different economic effects come into play and which are the key relevant parameters in the optimal income tax formulas of Mirrlees. The optimal non-linear tax rate formulas are expressed in terms of elasticities and the shape of the income distribution. These formulas are implemented numerically using empirical earnings distributions and a range of realistic elasticity parameters.

Suggested Citation

Saez, Emmanuel, Using Elasticities to Derive Optimal Income Tax Rates (March 2000). NBER Working Paper No. w7628, Available at SSRN: https://ssrn.com/abstract=221291

Emmanuel Saez (Contact Author)

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