<p>I don't see how the log-log utility function you specify would justify a regressive tax rate. In a simple setup, where government engaged in lump sum spending that had to be financed by a consumption or labor income tax, the log-log utility function would have all the same properties as more typical linear, quadratic, CRRA, and CARA utility functions. quasi-concave, increasing, weakly declining marginal utility, etc. </p>

<p>Usually the motivation for a regressive tax rate isn't the utility function over wealth. It is some other feature of the model, like taxes on wealth discouraging capital formation and therefore harming the productivity of poor households by making them less productive <a href="https://eml.berkeley.edu/~saez/course/Judd_JPubE(1985).pdf" rel="nofollow noreferrer">(Judd (1985)</a>). Or some feature of the production function is tied to the income of the rich or high productivity specifically, consider this new paper Jones (2018):</p>

<blockquote>
  <p>This paper considers the taxation of top incomes when the following
  conditions apply: (i) new ideas drive economic growth, (ii) the reward
  for creating a successful innovation is a top income, and (iii)
  innovation cannot be perfectly targeted by a separate research subsidy
  — think about the business methods of Walmart, the creation of Uber,
  or the “idea” of Amazon.com. These conditions lead to a new term in
  the Saez (2001) formula for the optimal top tax rate: by slowing the
  creation of the new ideas that drive aggregate GDP, top income
  taxation reduces everyone’s income, not just the income at the top.
  When the creation of ideas is the ultimate source of economic growth,
  this force sharply constrains both revenue-maximizing and
  welfare-maximizing top tax rates. <strong>For example, for extreme parameter
  values, maximizing the welfare of the middle class requires a 
  negative top tax rate: the higher income that results from the subsidy
  to innovation more than makes up for the lost redistribution.</strong> More
  generally, the calibrated model suggests that incorporating ideas and
  economic growth cuts the optimal top marginal tax rate substantially
  relative to the basic Saez calculation</p>
</blockquote>

<p>Source: <a href="https://www8.gsb.columbia.edu/faculty-research/sites/faculty-research/files/finance/Macro%20Workshop/toptax.pdf" rel="nofollow noreferrer">Taxing Top Incomes in a World of Ideas</a></p>

CC BY-SA 4.0
2019-01-16T23:09:19.277Z
Thank you for the answer. I will come back to your answer after some time taking care of more urgent business.
Hans
CC BY-SA 4.0
2019-01-14T11:33:40.027Z
2019-01-14T11:33:40.027Z
BKay
<p>I see some discussion that the reasoning for the construction of a tax rate function is the utility function. Whould <span class="math-container">$u=\ln\ln w$</span> function where <span class="math-container">$u$</span> is the utility and <span class="math-container">$w$</span> the wealth give a regressive tax rate?</p>

<utility><optimal-taxation>
A utility function that gives a regressive tax rate
Hans
# A utility function that gives a regressive tax rate

(Asked by: username_0 on 2019-01-13)

I see some discussion that the reasoning for the construction of a tax rate function is the utility function. Whould $u=\ln\ln w$ function where $u$ is the utility and $w$ the wealth give a regressive tax rate?

**Tags:** utility, optimal-taxation

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## 1 answers

### Answer by username_1 on 2019-01-14. Score: 1

I don't see how the log-log utility function you specify would justify a regressive tax rate. In a simple setup, where government engaged in lump sum spending that had to be financed by a consumption or labor income tax, the log-log utility function would have all the same properties as more typical linear, quadratic, CRRA, and CARA utility functions. quasi-concave, increasing, weakly declining marginal utility, etc.

Usually the motivation for a regressive tax rate isn't the utility function over wealth. It is some other feature of the model, like taxes on wealth discouraging capital formation and therefore harming the productivity of poor households by making them less productive [(Judd (1985)](https://eml.berkeley.edu/~saez/course/Judd_JPubE(1985).pdf)). Or some feature of the production function is tied to the income of the rich or high productivity specifically, consider this new paper Jones (2018):

> This paper considers the taxation of top incomes when the following
> conditions apply: (i) new ideas drive economic growth, (ii) the reward
> for creating a successful innovation is a top income, and (iii)
> innovation cannot be perfectly targeted by a separate research subsidy
> — think about the business methods of Walmart, the creation of Uber,
> or the “idea” of Amazon.com. These conditions lead to a new term in
> the Saez (2001) formula for the optimal top tax rate: by slowing the
> creation of the new ideas that drive aggregate GDP, top income
> taxation reduces everyone’s income, not just the income at the top.
> When the creation of ideas is the ultimate source of economic growth,
> this force sharply constrains both revenue-maximizing and
> welfare-maximizing top tax rates. **For example, for extreme parameter
> values, maximizing the welfare of the middle class requires a
> negative top tax rate: the higher income that results from the subsidy
> to innovation more than makes up for the lost redistribution.** More
> generally, the calibrated model suggests that incorporating ideas and
> economic growth cuts the optimal top marginal tax rate substantially
> relative to the basic Saez calculation

Source: [Taxing Top Incomes in a World of Ideas](https://www8.gsb.columbia.edu/faculty-research/sites/faculty-research/files/finance/Macro%20Workshop/toptax.pdf)

> **Comments:**
> **username_0**: Thank you for the answer. I will come back to your answer after some time taking care of more urgent business.  

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