Optimal progressive taxation and the skill premium

The stylized facts suggest a negative relationship between tax progres- sivity and the skill premium from the early 1960s until the early 1990s, and a positive one thereafter. They also generally imply rising tax progressivity, except for the 1980s. We ask whether optimal tax policy chosen by a benev- olent government is consistent with these observations, taking into account the demographic and technological factors that have also a¤ected the skill premium during these periods. We and that optimal policy delivers both a progressive tax system and model predictions which are generally consistent, except for the 1980s, with the stylized facts relating to the skill premium and progressivity. To capture the patterns in the data over the 1980s requires that we adopt a government policy which is biased towards the interests of skilled agents. Thus, changes in the preferences of policy-makers appear to be a potentially important factor in determining the evolution of the observed skill premium