THREE ESSAYS ON INCOME TAX PROGRESSIVITY (PUBLIC FINANCE, OPTIMAL, IMPLICIT)

The three essays take different approaches to the subject of income tax progressivity. Chapter 1 introduces uncertainty into a model of optimal linear income taxation. Results include: a three-way decomposition of the optimal tax rate into insurance, redistribution, and labor supply components; derivation of sufficient conditions for the optimal tax rate to increase with the level of uncertainty in the economy; and construction of an example where the taxing authority responds to an increase in uncertainty by lowering the optimal tax rate. Marginal rate progressivity is the subject of Chapter 2, which extends the linear model to a particular class of nonlinear tax systems, namely the class of exponential tax functions. In the context of a special case, it is shown there is a tendency for marginal rate progressivity to increase when the level of uncertainty surrounding incomes increases. Numerical simulations are presented to show the magnitudes involved. In Chapter 3, the subject of income tax progressivity is approached from a measurement standpoint. It is argued that the lower pre-tax returns to tax favored assets are essentially an implicit tax on investment in these assets. Ignoring this implicit tax biases downward measures of income tax progressivity. By examining municipal bond and housing markets (two prime examples of tax favored assets), it is demonstrated that the actual burden of the Federal income tax system is much more progressive than traditional measures indicate.