1993 Reports

The Optimal Income Tax Schedule

Lancaster, Kelvin

The principal conclusion of this paper is that the generic pattern for the optimal income tax schedule is that of a monotonically rising marginal tax rate. The belief that the marginal rate should decline to zero at the upper end of the scale is not supported. The results hold for high and low elasticities of labor leisure substitution, and for additive as well as strictly concave welfare functions. Differences between the conclusions of this paper and those of previous writers are due primarily to careful interpretation and analysis of the optimal solution, rather than differences between the models, although these exist.