Tax progressivity and the Pareto tail of income distributions

In a continuous-time version of the Bewley–Huggett–Aiyagari model, this paper shows theoretically and numerically that the fatness of the Pareto upper tail of the income distribution depends on tax progressivity only through the general equilibrium effect on the interest rate. With confiscatory taxes, where the marginal income tax rate approaches 100% at the top, the Pareto exponent is independent of tax progressivity.