Piecewise Linear Taxation and Top Incomes
Workingpaper by Yuri Andrienko , Patricia Apps and Ray Rees
Presented by Ray Rees at OFS Internal Seminar October 24th.
In a number of high-income countries over the past three decades there has been both large growth in inequality of wages and income and a shift in the burden of taxation from the top to the middle of the income distribution. This paper applies the model of optimal piecewise linear taxation to address the issue of the taxation of top incomes. Our numerical results suggest that the appropriate response to the large increase in wage and income inequality is a shift towards a more progressive income tax system, implemented by a lower tax rate on the lower half of the distribution, accompanied by a lower lump sum transfer, together with a highly progressive structure of tax rates in the upper half, with a sharp di¤erentiation between the top 10% and the top 1% and a higher top tax rate.