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Emmanuel Saez on Ramsey Rule - Dictionary of Arguments

Saez I 131
Ramsey rule/Saez/Zucman: the cardinal rule of optimal taxation, called the Ramsey rule: governments should not tax too much what’s elastic.
Saez/Zucman: Ramsey’s approach was limited. It considered only a single tax rate, what is known as a flat tax, but the flat tax is a crude instrument. In principle, the income tax can be made progressive, with higher incomes subject to higher marginal tax rates. In practice, as we’ve seen, that’s how the income tax works in almost all democracies. Researchers in the late 1990s extended the Ramsey result and investigated the optimal tax rate for the rich when the income tax is progressive. As in the standard Ramsey rule, the top marginal income tax rate
Saez I 132
that maximizes government revenue is inversely proportional to the >elasticity of taxable income. But with a twist: the elasticity that matters is only that of the rich. Moreover, the optimal rate now also depends on the level of inequality: the higher the concentration of income, the larger the optimal rate to be imposed on the affluent.(1)


1. Diamond, Peter A. “Optimal Income Taxation: An Example with a U-shaped Pattern of Optimal Marginal Tax Rates.” American Economic Review 88, no. 1 (1998): 83–95.
and
Saez, Emmanuel. “Using Elasticities to Derive Optimal Income Tax Rates.” Review of Economic Studies 68, no. 1 (2001): 205–229.


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Saez, Emmanuel


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