Aggregate and Distributional Effects of Increasing Taxes on Top Income Earners

SAFE Working Paper No. 113

35 Pages Posted: 8 Aug 2015

See all articles by Bettina Brüggemann

Bettina Brüggemann

McMaster University

Jinhyuk Yoo

Goethe University Frankfurt - Institute for Monetary and Financial Stability (IMFS); Goethe University Frankfurt; The Bank of Korea

Date Written: July 13, 2015

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.

Keywords: Top Income Taxation, Heterogeneous Agents, Incomplete Markets, Income and Wealth Inequality

JEL Classification: E21, E62, H21, H24

Suggested Citation

Brüggemann, Bettina and Yoo, Jinhyuk, Aggregate and Distributional Effects of Increasing Taxes on Top Income Earners (July 13, 2015). SAFE Working Paper No. 113. Available at SSRN: https://ssrn.com/abstract=2639673 or http://dx.doi.org/10.2139/ssrn.2639673

Bettina Brüggemann

McMaster University ( email )

Hamilton
Canada

Jinhyuk Yoo (Contact Author)

Goethe University Frankfurt - Institute for Monetary and Financial Stability (IMFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Register to save articles to
your library

Register

Paper statistics

Downloads
66
rank
324,262
Abstract Views
530
PlumX Metrics