Heterogeneity and Government revenues: Higher taxes at the top?

Recognition Program

Authors: Nezih Guner and Gustavo Ventura

Journal of Monetary Economics, Vol. 80, 69-85, January, 2016

How effective is a more progressive tax scheme in raising revenues? We answer this question in a life-cycle economy with heterogeneity across households and endogenous labor supply. Our findings show that a tilt of the U.S. income tax schedule towards high earners leads to small increases in revenue. Maximal revenue in the long run is only 6.8% higher than in our benchmark – about 0.8% of initial GDP – while revenues from all sources increase by just about 0.6%. Our conclusions are that policy recommendations of this sort are misguided if the aim is to exclusively raise government revenue.

This paper is acknowledged by the Barcelona GSE Research Recognition Program