Can the Graduated Income Tax Survive Optimal Tax Analysis?
Published in Tax Law Review, Vol. 53, p. 51-, 1999 Optimal tax analysis attempts to find the income tax rate structure which maximizes social welfare, under a chosen social welfare function (which can range from purely utilitarian to a Rawlsian maximin). It provides sophisticated mathematical techniques for balancing the welfare gains from redistribution against the welfare losses from the disincentive effects of taxation. Although the results of optimal tax simulations are sensitive to factual assumptions (relating to the rate at which the marginal utility of money declines, the strength of the disincentive effects of taxation, and the distribution of wage rates) and to the choice of social welfare function, one result is surprisingly robust: the marginal tax rate rises through the bottom decile of the societal wage distribution, but falls as income increases thereafter. These results provide high-level intellectual support for the attack on progressive marginal rates by the flat tax
