We use variation in marginal tax rates and in tax bracket thresholds at which they apply in order to identify the substitution and income effects of tax reforms. We use a triple-difference estimator that exploits variation from subnational tax reforms, for which behavioral responses to taxes are identified even in the presence of unobservable shocks to the income distribution. While high-income taxpayers respond more to tax changes, our results suggest this reflects much more the income or salience effects of tax reforms, rather than inherent heterogeneity in substitution effects. We discuss the implications for optimal redistributive tax policies.

This paper develops a general framework to construct optimal policy reforms starting from a status quo set of policies. We show that if a policymaker can control how fiscal externalities are spent, then the welfare-weighted marginal value of public funds (WMVPF) is the relevant sufficient statistic for determining optimal policy reforms. If a policymaker cannot control how fiscal externalities are spent, then the welfare-weighted net social benefit (WNSB) is the relevant sufficient statistic. If a policymaker can control how a fraction of fiscal externalities are spent, then the relevant sufficient statistic is an "augmented internal WMVPF" consisting of an "internal WMVPF" plus an "external correction" term. We provide a number of stylized examples to illustrate how and when in practice to use the WMVPF versus the WNSB to determine optimal policy reforms.

Applying the Laffer curve concept to individuals, a taxpayer lies on the “wrong” side of the Laffer curve if higher tax rates reduce their tax payments. With a tax increase restricted to higher-income individuals, some taxpayers are guaranteed to be on the wrong side of the Laffer curve. Despite its distributional properties, a progressive reform will also reduce the average tax rates of some high-income taxpayers. In relying on tax payments, standard measures systematically misrepresent the distribution of tax reform burdens, as illustrated by the 2024 Australian tax reform.

This study examines optimal government redistribution in a Mirrleesian framework, accounting for a negative effect of longer working hours on productivity. A government ignoring this effect perceives labor supply as insufficient and sets lower marginal income taxes to encourage work. In contrast, a government recognizing the endogenous relationship between productivity and labor supply redistributes more. However, the resulting marginal taxes are still lower than those predicted by standard models where productivity is independent of working hours.