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    Designing, Not Checking, for Policy Robustness: An Example with Optimal Taxation
    15 Dec 2020Working Paper Summaries

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

    by Benjami Lockwood, Afras Y. Sial, and Matthew C. Weinzierl
    The approach used by most economists to check academic research results is flawed for policymaking and evaluation. The authors propose an alternative method for designing economic policy analyses that might be applied to a wide range of economic policies.
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    Author 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 in benchmark analyses, raising top marginal tax rates by between 5 and 7 percentage points, and generating modest expected welfare gains.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: November 2020
    • HBS Working Paper Number: NBER Working Paper Series, No. 28098
    • Faculty Unit(s): Business, Government and International Economy
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    Matthew C. Weinzierl
    Matthew C. Weinzierl
    Joseph and Jacqueline Elbling Professor of Business Administration
    Senior Associate Dean, Chair, MBA Program
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