Public Finance Theory
Given an elasticity of taxable income, a Pareto parameter for the income distribution, and a social welfare weight, compute the revenue-maximising or welfare-maximising top marginal tax rate using the Saez (2001) formula.
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Empirical presets
Saez (2001); Chetty (2012)
Chetty (2012) meta-analysis: 0.1–0.5; central estimate 0.25
US upper tail: ~1.5–2.5 (Saez 2001). Lower a = more concentrated top incomes.
0 = revenue-maximising (Laffer peak); 1 = equal welfare weights (utilitarian)
Result
At these parameter values, a top marginal rate of 69.6% maximises tax revenue from incomes above the threshold. Raising the rate further would reduce revenue as high earners reduce taxable income.
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Laffer Curve
Revenue-maximising rate: τ* = 69.6%Revenue normalised to 1 at τ*. Assumes Pareto-distributed top incomes with parameter a = 1.75.
Sensitivity Analysis
Optimal top rate τ* across empirical ranges of ε and a (g = 0.00 fixed). Highlighted cell = current parameters.
| ε \ a | a = 1.5 | a = 1.75 | a = 2 |
|---|---|---|---|
| ε = 0.1 | 87% | 85% | 83% |
| ε = 0.25 | 73% | 70% | 67% |
| ε = 0.5 | 57% | 53% | 50% |