Inequality and Optimal Redistributive Tax and Transfer Policies
AbstractThis article argues that the validity of the increasingly fashionable policy adviceâmaximizing neutrality in taxation and addressing the distributive objective primarily through expenditure policyâis 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 societyâs aversion to inequality.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 99/60.
Date of creation: 01 Apr 1999
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Postal: International Monetary Fund, Washington, DC USA
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Web page: http://www.imf.org/external/pubind.htm
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Other versions of this item:
- Howell H. Zee, 2004. "Inequality and Optimal Redistributive Tax and Transfer Policies," Public Finance Review, , vol. 32(4), pages 359-381, July.
- NEP-ALL-2013-02-16 (All new papers)
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