1994 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 should 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 the formulation of the optimizing problem and detailed interpretation and analysis of the solution, rather thank to differences between the underlying models, although these exist.