Heterogeneity and Government Revenues: Higher Taxes at the Top?

43 Pages Posted: 25 Sep 2014

See all articles by Nezih Guner

Nezih Guner

ICREA-MOVE; Autonomous University of Barcelona; Barcelona Graduate School of Economics (Barcelona GSE)

Martin Lopez-Daneri

Temple University - Department of Economics

Gustavo Ventura

Arizona State University (ASU)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2014

Abstract

We evaluate the effectiveness of a more progressive tax scheme in raising government revenues. We develop a life-cycle economy with heterogeneity and endogenous labor supply. Households face a progressive income tax schedule, mimicking the Federal Income tax, and flat-rate taxes that capture payroll, state and local taxes and the corporate income tax. We parameterize this model to reproduce aggregate and cross-sectional observations for the U.S. economy, including the shares of labor income for top earners. We find that a tilt of the Federal income tax schedule towards high earners leads to small increases in revenues which are maximized at an effective marginal tax rate of about 36.9% for the richest 5% of households -- in contrast to a 21.7% marginal rate in the benchmark economy. Maximized revenue from Federal income taxes is only 8.4% higher than it is in the benchmark economy, while revenues from all sources increase only by about 1.6%. The room for higher revenues from more progressive taxes is even lower when average taxes are higher to start with. We conclude that these policy recommendations are misguided if the aim is to exclusively raise government revenue.

Keywords: labor supply, progressivity, taxation

JEL Classification: E6, H2

Suggested Citation

Guner, Nezih and Lopez-Daneri, Martin and Ventura, Gustavo, Heterogeneity and Government Revenues: Higher Taxes at the Top? (July 2014). CEPR Discussion Paper No. DP10071, Available at SSRN: https://ssrn.com/abstract=2501545

Nezih Guner (Contact Author)

ICREA-MOVE ( email )

Campus de Bellaterra-UAB Edifici B (s/n)
EDIFICI B
Cerdanyola del Vallès
, Barcelona 08193
Spain

Autonomous University of Barcelona ( email )

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Martin Lopez-Daneri

Temple University - Department of Economics ( email )

Philadelphia, PA 19122
United States

Gustavo Ventura

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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