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  • 2021
  • Article
  • Tax Policy and the Economy

Designing, Not Checking, for Policy Robustness: An Example with Optimal Taxation

By: Benjamin B. Lockwood, Afras Sial and Matthew C. Weinzierl
  • Format:Print
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Abstract

Economists typically check the robustness of their results by comparing them across plausible ranges of parameter values and model structures. A preferable approach to robustness—for the purposes of policymaking and evaluation—is to design policy that takes these ranges into account. We modify the standard optimal income tax model to include the policymaker’s subjective uncertainty over parameter values, and we characterize robust optimal policy as that which maximizes expected social welfare. After calibrating uncertainty over the elasticity of taxable income from past empirical work and novel survey data on economists’ beliefs, we compare the implied robust optimal marginal tax rates to the alternative benchmark policy based on the best point estimates of relevant parameters. Our results suggest that robust optimal marginal tax rates are typically more progressive than benchmark analyses, raising top marginal tax rates by 5–7 percentage points and generating modest expected welfare gains.

Keywords

Optimal Taxation; Income Tax; Social Welfare; Elasticity; Income; Taxation; Policy

Citation

Lockwood, Benjamin B., Afras Sial, and Matthew C. Weinzierl. "Designing, Not Checking, for Policy Robustness: An Example with Optimal Taxation." Tax Policy and the Economy 35 (2021).
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About The Author

Matthew C. Weinzierl

Business, Government and the International Economy
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  • Real Growth in Space Manufacturing Output Substantially Exceeds Growth in the Overall Space Economy By: Tina Highfill and Matthew Weinzierl
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