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Inequality and Optimal Redistributive Tax and Transfer Policies

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  • Howell H. Zee

    (International Monetary Fund)

Abstract

This article argues that the validity of the increasingly fashionable policy advice—maximizing neutrality in taxation and addressing the distributive objective primarily through expenditure policy—is questionablebecause it ignores the revenue-raising aspect of progressive taxation. On the basis of a simple model in which the tax revenue is used exclusively to finance (perfectly) targeted transfers to the poor, the article shows that not only would it be optimal to finance the targeted transfers with progressive taxation, but the optimal progressivity increases unambiguously with growing income inequality. This conclusion holds up under different assumptions about the efficiency cost of taxation and society’s aversion to inequality.

Suggested Citation

  • Howell H. Zee, 2004. "Inequality and Optimal Redistributive Tax and Transfer Policies," Public Finance Review, , vol. 32(4), pages 359-381, July.
    • Handle: RePEc:sae:pubfin:v:32:y:2004:i:4:p:359-381
    DOI: 10.1177/1091142104264501
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    References listed on IDEAS

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    Cited by:

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    2. Steiner, Susan, 2005. "Decentralisation and Poverty Reduction: A Conceptual Framework for the Economic Impact," GIGA Working Papers 3, GIGA German Institute of Global and Area Studies.
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    4. Chu, Ke-young & Davoodi, Hamid & Gupta, Sanjeev, 2003. "Income distribution and tax, and government social spending policies in developing countries," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34918, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    5. Kanayo K. Ogujiuba, 2022. "Which Demographic Quintile Benefits from Public Health Expenditure in Nigeria: A Marginal Benefit Analysis," Economies, MDPI, vol. 10(10), pages 1-17, October.

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