The standard models with incomplete markets (e.g., Aiyagari) have difficulty justifying the current income tax rates. Given the highly skewed income distribution, the majority of the population would be in favor of raising taxes to a much higher level. We show that the political equilibrium tax rate is not very far from the current one, once we take into account (i) the ex-ante heterogeneity of earnings and (ii) income-dependent voting behavior (Mahler, 2008) across households.
Yongsung Chang, Professor of Seoul National University, is a macroeconomist who specializes in economic fluctuations and labor-market dynamics. He obtained his Ph. D in economics from the University of Rochester in 1997. He held positions at the University of Pennsylvania, University of Rochester, and Yonsei University. He also worked for the Federal Reserve Bank of Richmond as a senior economist. He has published more than 20 research articles in top tier academic journals such as American Economic Review, Journal of Monetary Economics, and International Economic Review. He is currently an associate editor of the Journal of Monetary Economics, and Journal of Macroeconomics and the advisory board member of the Carnegie-Rochester Conference Series on Public Policy. He is currently a long-term consultant for the Federal Reserve Bank of Richmond.
