Paul L. Caron

Wednesday, November 20, 2019

Tax Progressivity And Top Incomes: Evidence From Tax Reforms

Enrico Rubolino (University of Essex) & Daniel Waldenstrom (Paris School of Economics), Tax Progressivity and Top Incomes: Evidence from Tax Reforms:

We study the link between tax progressivity and top income shares. Using variation from large-scale Western tax reforms in the 1980s and 1990s and synthetic control method esti- mation, our results suggest that reductions in tax progressivity had large and lasting positive impacts on top income shares. The effects are largest within the top percentile while being almost zero in the lower half of the top decile, and they seem mainly related to cuts in top marginal tax rates. The results are robust to different model specifications, placebo tests in time and space and controlling for other simultaneous institutional reforms. Searching for mechanisms, we observe that the share of capital income of total income in the top income percentile increased after the reforms, which indicates that tax avoidance behavior related to the management of capital incomes could lie behind some of the observed effects.

Figure 1

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