Article | Journal of Economic Perspectives | fall 2009

Optimal Taxation in Theory and Practice

by N. Gregory Mankiw, Matthew C. Weinzierl and Danny Yagan

Abstract

We highlight and explain eight lessons from optimal tax theory and compare them to the last few decades of OECD tax policy. As recommended by theory, top marginal income tax rates have declined, marginal income tax schedules have flattened, redistribution has risen with income inequality, and commodity taxes are more uniform and are typically assessed on final goods. However, trends in capital taxation are mixed, and capital income tax rates remain well above the zero level recommended by theory. Moreover, some of theory's more subtle prescriptions, such as taxes that involve personal characteristics, asset-testing, and history-dependence, remain rare in practice. Where large gaps between theory and policy remain, the difficult question is whether policymakers need to learn more from theorists, or the other way around.

Keywords: Taxation; Theory; Practice; Policy; Distribution; Capital; Assets; History; Equality and Inequality; Personal Characteristics;

Citation:

Mankiw, N. Gregory, Matthew C. Weinzierl, and Danny Yagan. "Optimal Taxation in Theory and Practice." Journal of Economic Perspectives 23, no. 4 (fall 2009): 147–174.