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A Fair Day's Pay for a Fair Day's Work: Optimal Tax Design as Redistributional Arbitrage
We study optimal tax design based on the idea that policy-makers face trade-offs betweenmultiple margins of redistribution. Within a Mirrleesian economy with earnings, consumptionand retirement savings, we derive a novel formula for optimal income and savings distortionsbased on redistributional arbitrage. We establish a sufficient statistics representation of thelabor income and capital tax rates on top income earners in dynamic environments, which relieson the observed distributions of both income and consumption. Because consumption has athinner Pareto tail than income, our quantitative ...