High Marginal Tax Rates on the Top 1%? Lessons from a Life Cycle Model with Idiosyncratic Income Risk [report]

Fabian Kindermann, Dirk Krueger
2014 unpublished
This paper argues that high marginal labor income tax rates are an effective tool for social insurance even when households have high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. We construct a large scale Overlapping Generations Model with uninsurable labor productivity risk, show that it has a realistic wealth distribution and then numerically characterize the optimal top marginal rate. We find that marginal tax rates for top 1%
more » ... es for top 1% earners of close to 90% are optimal as long as the earnings and wealth distributions display a degree of concentration as observed in US data. JEL Classifications: E62, H21, H24
doi:10.3386/w20601 fatcat:4fws43nwh5bgfdrs3ndyu5fsxm