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Taxing Top Earners: A Human Capital Perspective

We assess the consequences of substantially increasing the marginal tax rate on U.S. top earners using a human capital model. We find that (1) the peak of the model Laffer curve occurs at a 52 percent top tax rate, (2) if human capital were exogenous, then the top of the Laffer curve would occur at a 66 percent top tax rate and (3) applying the theory and methods that Diamond and Saez (2011) use to provide quantitative guidance for setting the top tax rate to model data produces a tax rate that substantially exceeds 52 percent.

Authors: 
Alejandro Badel, Federal Reserve Bank of St. Louis
Mark Huggett, Georgetown University
Publication Date: 
November, 2014
HCEO Working Groups: 
Publication Status: 
Document Number: 
2014-021
File Description: 
First version, October 2014