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Top-income taxation with salience effects: an elasticity-based analysis
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This paper extends the model in Piketty et al. (2014) to derive optimal top-income tax rates. We assume the existence of salience effects so agents misperceive the top-income tax rates applied. We show top-income rates decrease in the degree of salience for revenue maximizing governments and that they are higher than in Piketty et al. (2014). Additionally, the government should prevent income sheltering and decrease salience by regulating the tax consultancy industry given the richest might resort to these services to improve their tax responsiveness. We also conclude that in economies where a non-salient tax rate negatively affects all agents the socially optimal tax rate is bounded above by its revenue maximizing counterpart
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Tax salience Income tax Public economics Elasticity Top income tax rate