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Tax progressivity and top incomes evidence from tax reforms

Abstract

We study the link between tax progressivity and top income shares. Using variation from Western tax reforms in the 1980s and 1990s and synthetic control method estimation, we find that reductions in tax progressivity had large and lasting positive impacts on top income shares. The effects are largest within the top percentile and almost zero in the lower half of the top decile, and all results are robust to different model specifications, placebo tests in time and space, and controlling for other contemporaneous reforms. Searching for mechanisms, we find that the effects seem to operate mainly through reductions in top marginal tax rates and that the share of capital income in top incomes increased after the reforms, indicating that tax avoidance behavior could explain some of the observed effects.

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Acknowledgments

We thank three anonymous referees, Spencer Bastani, Wojciech Kopczuk, Camille Landais, Andrew Leigh, Jim Rose, Wiemer Salverda, Håkan Selin, Joel Slemrod and participants at workshop at DG ECFIN, EIB, University of Barcelona and University ofCopenhagen for comments.

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Correspondence to Daniel Waldenström.

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Rubolino, E., Waldenström, D. Tax progressivity and top incomes evidence from tax reforms. J Econ Inequal 18, 261–289 (2020). https://doi.org/10.1007/s10888-020-09445-8

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Keywords

  • Income inequality
  • Income taxation
  • Synthetic control method