Designing, not Checking, for Policy Robustness: An Example with Optimal Taxation / Benjamin Lockwood, Afras Y. Sial, Matthew C. Weinzierl.

Format:

Book

Author/Creator:

Lockwood, Benjamin.

Contributor:

National Bureau of Economic Research.

Sial, Afras Y.

Weinzierl, Matthew C.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28098.

NBER working paper series no. w28098

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

Economists typically check the robustness of their results by comparing them across plausible ranges of parameter values and model structures. A preferable approach to robustness--for the purposes of policymaking and evaluation--is to design policy that takes these ranges into account. We modify the standard optimal income tax model to include the policymaker's subjective uncertainty over parameter values, and we characterize robust optimal policy as that which maximizes expected social welfare. After calibrating uncertainty over the elasticity of taxable income from past empirical work and novel survey data on economists' beliefs, we compare the implied robust optimal marginal tax rates to the alternative benchmark policy based on the best point estimates of relevant parameters. Our results suggest that robust optimal marginal tax rates are typically more progressive than in benchmark analyses, raising top marginal tax rates by between 5 and 7 percentage points, and generating modest expected welfare gains.

Notes:

Print version record

November 2020.