Alejandro Badel, Mark Huggett

We assess the consequences of substantially increasing the marginal tax rate on U.S. top earners using a human capital model. We find that (1) the peak of the model Laffer curve occurs at a 52 percent top tax rate, (2) if human capital were exogenous, then the top of the Laffer curve would occur at a 66 percent top tax rate and (3) applying the theory and methods that Diamond and Saez (2011) use to provide quantitative guidance for setting the top tax rate to model data produces a tax rate that substantially exceeds 52 percent.

JEL Codes
D91: Intertemporal Consumer Choice; Life Cycle Models and Saving
E21: Macroeconomics: Consumption; Saving; Wealth
H20: Taxation, Subsidies, and Revenue: General
J24: Human Capital; Skills; Occupational Choice; Labor Productivity
human capital
marginal tax rate
Laffer curve