Working Paper | HBS Working Paper Series | 2014

Positive and Normative Judgments Implicit in U.S. Tax Policy, and the Costs of Unequal Growth and Recessions

by Benjamin B. Lockwood and Matthew Weinzierl

Abstract

We use official data and standard optimal tax conditions to infer the positive and normative judgments implicit in U.S. tax policy since 1979. We find that explanations within this framework for the time path of U.S. policy require central parameters of the model, namely the elasticity of taxable income or the marginal social welfare weights on top earners, to take unconventional values. We use inferred social preferences to provide novel estimates of the welfare costs of unequal growth and recessions and find that they are sensitive to the assumed distortionary costs of taxation and the year from which preferences are derived. We explore several possible explanations for our findings with available data.

Keywords: Equality and Inequality; Taxation; Policy; Welfare or Wellbeing; Public Administration Industry; United States;

Citation:

Lockwood, Benjamin B., and Matthew Weinzierl. "Positive and Normative Judgments Implicit in U.S. Tax Policy, and the Costs of Unequal Growth and Recessions." Harvard Business School Working Paper, No. 14-119, June 2014.