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A Fair Day's Pay for a Fair Day's Work: Optimal Tax Design as Redistributional Arbitrage

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Abstract

We study optimal tax design based on the idea that policy-makers face trade-offs between multiple margins of redistribution. Within a Mirrleesian economy with earnings, consumption and retirement savings, we derive a novel formula for optimal income and savings distortions based on redistributional arbitrage. We establish a sufficient statistics representation of the labor income and capital tax rates on top income earners in dynamic environments, which relies on the observed distributions of both income and consumption. Because consumption has a thinner Pareto tail than income, our quantitative results suggest that it is optimal to shift a substantial fraction of the top earners' tax burden from income to savings.

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  • Christian Hellwig & Nicolas Werquin, 2022. "A Fair Day's Pay for a Fair Day's Work: Optimal Tax Design as Redistributional Arbitrage," Working Paper Series WP 2022-03, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:93617
    DOI: 10.21033/wp-2022-03
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    7. Spiritus, Kevin & Lehmann, Etienne & Renes, Sander & Zoutman, Floris T., 0. "Optimal taxation with multiple incomes and types," Theoretical Economics, Econometric Society.
    8. Florian Scheuer & Joel Slemrod, 2021. "Taxing Our Wealth," Journal of Economic Perspectives, American Economic Association, vol. 35(1), pages 207-230, Winter.
    9. Narayana Kocherlakota & Luigi Pistaferri, 2009. "Asset Pricing Implications of Pareto Optimality with Private Information," Journal of Political Economy, University of Chicago Press, vol. 117(3), pages 555-590, June.
    10. Karl Schulz, 2021. "Redistribution of Return Inequality," CESifo Working Paper Series 8996, CESifo.
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    Cited by:

    1. Alexandre Gaillard & Christian Hellwig & Philipp Wangner & Nicolas Werquin, 2023. "Consumption, Wealth, and Income Inequality: A Tale of Tails," Working Paper Series WP 2023-43, Federal Reserve Bank of Chicago.
    2. Antoine Ferey & Benjamin B. Lockwood & Dmitry Taubinsky, 2024. "Sufficient Statistics for Nonlinear Tax Systems with General Across-Income Heterogeneity," American Economic Review, American Economic Association, vol. 114(10), pages 3206-3249, October.

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    More about this item

    Keywords

    Capital Taxation; Income Taxation; Consumption Inequality;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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