Robust Bounds on Optimal Tax Progressivity
This paper studies optimal tax design when the cross-sectional distribution of types may be misspecified, and the government acts cautiously vis-à-vis these misspecifications. In models without such concerns, fat-tailed distributions imply positive—often high—top marginal tax rates. We demonstrate that even vanishingly small misspecification concerns overturn this finding, driving top marginal tax rates to zero. Calibrating concerns to observed variation in income distributions shows that taxes for below-average incomes remain essentially unchanged, while progressivity for high-income earners is substantially reduced.
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