Grasping Reality on TypePad, by Brad DeLong

Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva (2011): Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities: "A model where top incomes respond to marginal tax rates through... (1) the standard supply-side channel... the tax avoidance channel, [and] (3) the compensation-bargaining channel through efforts in influencing own-pay setting.... The first elasticity (supply side) is the sole real factor limiting optimal top tax rates. The optimal tax system should be designed to minimize the second elasticity (avoidance) through tax enforcement and tax neutrality... in which case the second elasticity becomes irrelevant. The optimal top tax rate increases with the third elasticity (bargaining) as bargaining efforts are zero-sum in aggregate..... There is a strong correlation between cuts in top tax rates and increases in top 1% income shares since 1975, implying that the overall elasticity is large. But top income share increases have not translated into higher economic growth, consistent with the zero-sum bargaining model. This suggests that the first elasticity is modest in size and that the overall effect comes mostly from the third elasticity. Consequently, socially optimal top tax rates might possibly be much higher than what is commonly assumed...

Emmanuel Saez and Stefanie Stantcheva (2016): Generalized Social Marginal Welfare Weights for Optimal Tax Theory: "Evaluat[ing] tax reforms by aggregating money-metric losses and gains of different individuals using 'generalized social marginal welfare weights.' Optimum tax formulas take the same form as standard welfarist tax formulas.... Weights directly capture society’s concerns for fairness without being necessarily tied to individual utilities. Suitable weights can help reconcile discrepancies between the welfarist approach and actual tax practice, as well as unify in an operational way the most prominent alternatives to utilitarianism.... There is no social-welfare objective primitive.... Instead, our primitives are generalized social marginal-welfare weights which represent the value that society puts on providing an additional dollar of consumption to any given individual. These weights directly reflect society’s concerns for fairness.... We define a tax system as locally optimal if no small reform is desirable... Slides

Alan J. Auerbach and Kevin Hassett (2015): Capital Taxation in the Twenty-First Century: "To the extent that labor income inequality is the underlying source of overall inequality, it is hard to see why the appropriate policy response is a wealth tax, rather than, for example, an increase in the progressivity of labor income taxes, as indeed Piketty and his collaborators have proposed (Piketty, Saez, and Stantcheva 2014). It may well be true that the growing inequality of labor income is leading to a grow- ing concentration of capital ownership. Even so, the underlying factor driving inequality would be the dispersion of labor income...

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