Skill distribution and the optimal marginal income tax rate

This paper emphasizes the role of skill distribution in determining the optimal marginal tax rates. It rigorously shows that the optimal marginal tax rates can be strictly increasing, strictly decreasing, U-shaped, or inverse U-shaped as skill increases depending on the skill distribution.

► We extend Diamond's model by incorporating various types of income distribution. ► We show rigorously that income distribution affects optimal marginal tax rate. ► Optimal marginal tax rates can be strictly increasing or decreasing as income increases. ► Optimal marginal tax rates can be U-shaped or inverse U-shaped.