Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
    • Working Paper Summaries
  • Browse All
    Optimal Taxation in Theory and Practice
    19 Aug 2009Working Paper Summaries

    Optimal Taxation in Theory and Practice

    by N. Gregory Mankiw, Matthew Weinzierl and Danny Yagan
    Are developments in the theory of taxation improving tax policies around the world? The optimal design of a tax system is a topic that has long fascinated economic theorists and flummoxed economic policymakers. This paper explores the interplay between tax theory and tax policy. It identifies key lessons policymakers might take from the academic literature on how taxes ought to be designed, and it discusses the extent to which these lessons are reflected in actual tax policy. The authors find that there has been considerable change in the theory and practice of taxation over the past several decades—although the two paths have been far from parallel. Overall, tax policy has moved in the directions suggested by theory along a few dimensions, even though the recommendations of theory along these dimensions are not always definitive. Key concepts include:
    • Where large gaps between theory and policy remain, the harder question is whether policymakers need to learn more from theorists, or the other way around. Both possibilities have historical precedents.
    • Given the worldwide trend toward tax systems with flatter tax rates, it is at least arguable that the movement toward flatter taxes is consistent with prescriptions from theory.
    • Among OECD countries, top marginal rates have declined, marginal income tax schedules have flattened, and commodity taxes are more uniform and are typically assessed on final goods.
    • On the other hand, some results from optimal tax theory cannot be easily identified in actual policy and seem unlikely to be found there anytime soon. Trends in capital taxation are mixed, and rates are still well above the zero level recommended by theory.
    • Some of theory's more subtle prescriptions, such as taxes that involve personal characteristics, asset testing, and history dependence, remain rare.
    LinkedIn
    Email

    Author Abstract

    We highlight and explain eight lessons from optimal tax theory and compare them to the last few decades of OECD tax policy. As recommended by theory, top marginal income tax rates have declined, marginal income tax schedules have flattened, redistribution has risen with income inequality, and commodity taxes are more uniform and are typically assessed on final goods. However, trends in capital taxation are mixed, and capital income tax rates remain well above the zero level recommended by theory. Moreover, some of theory's more subtle prescriptions, such as taxes that involve personal characteristics, asset-testing, and history-dependence, remain rare in practice. Where large gaps between theory and policy remain, the difficult question is whether policymakers need to learn more from theorists, or the other way around. 35 pages.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: June 2009
    • HBS Working Paper Number: 09-140
    • Faculty Unit(s): Business, Government and International Economy
      Trending
        • 09 Dec 2019
        • Research & Ideas

        Identify Great Customers from Their First Purchase

        • 13 Aug 2021
        • Research & Ideas

        Managers, Here’s How to Bond with New Hires Remotely

        • 25 Feb 2019
        • Research & Ideas

        How Gender Stereotypes Kill a Woman’s Self-Confidence

        • 30 Nov 2021
        • Cold Call Podcast

        TikTok: Super App or Supernova?

        • 01 Feb 2022
        • Cold Call Podcast

        Making Diverse Leadership a Priority at Whittier College

    Matthew C. Weinzierl
    Matthew C. Weinzierl
    Joseph and Jacqueline Elbling Professor of Business Administration
    Chair, MBA Required Curriculum
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Finance
    • Theory

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College