Tax progressivity and the Pareto tail of income distributions

In a continuous-time version of the Bewley–Huggett–Aiyagari model, this paper shows theoretically and numerically that the fatness of the Pareto upper tail of the income distribution depends on tax progressivity only through the general equilibrium effect on the interest rate. With confiscatory taxe...

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Bibliographic Details
Published inEconomics letters Vol. 231; p. 111273
Main Authors Yang, C.C., Zhao, Xueya, Zhu, Shenghao
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.10.2023
Subjects
Bewley–Huggett–Aiyagari model
Pareto tail
Tax progressivity
Pareto tail
D31
E21
Tax progressivity
Bewley–Huggett–Aiyagari model
H31
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Summary:In a continuous-time version of the Bewley–Huggett–Aiyagari model, this paper shows theoretically and numerically that the fatness of the Pareto upper tail of the income distribution depends on tax progressivity only through the general equilibrium effect on the interest rate. With confiscatory taxes (marginal income tax rate approaching 100% at the top), the Pareto exponent is independent of tax progressivity. •Consider the imposition of the HSV tax scheme.•The Pareto exponent of the income distribution is independent of tax progressivity.•We show this result in a Bewley–Huggett–Aiyagari model.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2023.111273