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Actually, optimal taxation models tend to show that a base transfer at zero income with an initially "high" marginal rate for clawing back the transfer at the l

Actually, optimal taxation models tend to show that a base transfer at zero income with an initially "high" marginal rate for clawing back the transfer at the lowest end (but still no higher than 100%, and falling very quickly as earnings increase!) works very well. (Marginal rates then rise progressively for higher incomes, and paradoxically become lower again at the very top end, trending towards zero at the extreme top-end of the scale. This is actually a consistent result in non-linear incomes taxation models; the very top earner should face zero marginal tax on the very last cent she earns!) The intuition is that you only "feel" the high marginal rate if you earn very little, which impacts very few people; but the effect of making the break-even point more manageable with lower marginal rates for most earners is felt throughout the incomes scale. What really screws up things is higher-than-100% marginal rates, which are regrettably common in real-world systems amd completely useless.

littlestymaar 11mo ago
I'd be curious to read more about that, because none of what you've written makes any sense to me right now. (Why would we want zero marginal tax on top earner who already get zero marginal utility for her money in the first place ?).
- zozbot234 11mo ago
  The zero marginal tax only strictly applies to the very last cent the extreme top-earner is expected to earn in the tax period. The idea is that at this theoretical extreme top-end tax bracket basically no one is paying infra-marginal taxes, hence the share of the incentive effect compared to the pure revenue effect is maximized. So you'll want to ensure that this extreme top-earner is only paying in lower, infra-marginal tax brackets, which have no incentive effect on her. This cannot be done literally because of randomness and uncertainty, but the broad effect of paradoxically lowering optimal marginal rates at the top end is nonetheless real.
  - littlestymaar 11mo ago
    It's only real if you assume top earners have monetary incentives to work more, which is a very bold assumption in a world where the top earners don't even earn money through their work in the first place. And again, the utility of income for an individual is logarithmic with regard to their income, which means the marginal utility is the inverse function and that never stopped the top earners to want more.
    - zozbot234 11mo ago
      Labor income is very important at the top end. The work a CEO performs in her superintendence of a large company generates what's economically labor income, even when paid as stock grants, options or the like. Basically all professional income (including that of devs) is labor income, not capital income. (Besides, optimal taxation models also say that capital income should not be taxed at all, and you should concentrate "capital" taxes on sources of pure rent instead, with the rest of the burden falling on labor income and/or consumption! The intuition is that taxing invested capital is basically double taxation, since the apparent "returns" on capital are in fact wholly accounted for by time value and risk. There are important offsetting arguments, but these also become less relevant at the extreme top end of the scale.)
      - littlestymaar 11mo ago
        > Labor income is very important at the top end. The work a CEO performs in her superintendence of a large company generates what's economically labor income, even when paid as stock grants, options or the like. Basically all professional income (including that of devs) is labor income, not capital income. If the CEO has a significant voting power in his company, then it's capital income even if the said income is “a salary”. Like it or not. > Besides, optimal taxation models also say that capital income should not be taxed at all It would be nice if people advocating for their political view could stop labeling their view as “optimal”, but hey, this is economics so here we are.
        11mo ago

littlestymaar 11mo ago

I'd be curious to read more about that, because none of what you've written makes any sense to me right now. (Why would we want zero marginal tax on top earner who already get zero marginal utility for her money in the first place ?).

zozbot234 11mo ago
The zero marginal tax only strictly applies to the very last cent the extreme top-earner is expected to earn in the tax period. The idea is that at this theoretical extreme top-end tax bracket basically no one is paying infra-marginal taxes, hence the share of the incentive effect compared to the pure revenue effect is maximized. So you'll want to ensure that this extreme top-earner is only paying in lower, infra-marginal tax brackets, which have no incentive effect on her. This cannot be done literally because of randomness and uncertainty, but the broad effect of paradoxically lowering optimal marginal rates at the top end is nonetheless real.
- littlestymaar 11mo ago
  It's only real if you assume top earners have monetary incentives to work more, which is a very bold assumption in a world where the top earners don't even earn money through their work in the first place. And again, the utility of income for an individual is logarithmic with regard to their income, which means the marginal utility is the inverse function and that never stopped the top earners to want more.
  - zozbot234 11mo ago
    Labor income is very important at the top end. The work a CEO performs in her superintendence of a large company generates what's economically labor income, even when paid as stock grants, options or the like. Basically all professional income (including that of devs) is labor income, not capital income. (Besides, optimal taxation models also say that capital income should not be taxed at all, and you should concentrate "capital" taxes on sources of pure rent instead, with the rest of the burden falling on labor income and/or consumption! The intuition is that taxing invested capital is basically double taxation, since the apparent "returns" on capital are in fact wholly accounted for by time value and risk. There are important offsetting arguments, but these also become less relevant at the extreme top end of the scale.)
    - littlestymaar 11mo ago
      > Labor income is very important at the top end. The work a CEO performs in her superintendence of a large company generates what's economically labor income, even when paid as stock grants, options or the like. Basically all professional income (including that of devs) is labor income, not capital income. If the CEO has a significant voting power in his company, then it's capital income even if the said income is “a salary”. Like it or not. > Besides, optimal taxation models also say that capital income should not be taxed at all It would be nice if people advocating for their political view could stop labeling their view as “optimal”, but hey, this is economics so here we are.
      - 11mo ago