Top Incomes and Top Tax Rates: Implications for Optimal Taxation of Top Incomes in Finland

Abstract

We apply optimal top marginal tax rate formulas with alternative social preferences to the Finnish economy using evidence on the responsiveness of top incomes in Finland to changes in top tax rates that have taken place in Finland over the last 30 years. Based on the Finnish income distribution data (cross section) we estimated by using maximum likelihood method several two and three parameter distributions. Among two parameter distributions the Champernowne one is the best fitting for the pre-tax income distribution in Finland (1990-2010). We also recognize that there is much uncertainty particularly related to labour supply elasticity and do not simply rely on the central point estimate. It is safe to conclude from our application that the current top marginal tax rate in Finlandis not close to the top of the Dupuit-Laffer curve.