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On the Optimality of Progressive Income Redistribution

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  • Ozan Bakis
  • Baris Kaymak
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    Abstract

    We compute the optimal non-linear tax policy for a dynastic economy with uninsurable risk, where generations are linked by dynastic wealth accumulation and correlated incomes. Unlike earlier studies, we find that the optimal long-run tax policy is moderately regressive. Regressive taxes lead to higher output and consumption, at the expense of larger after-tax income inequality. Nevertheless, equilibrium effects and the availability of self-insurance via bequests mitigate the impact of regressive taxes on consumption inequality, resulting in improved average welfare overall. We also consider the optimal once-and-for-all change in the tax system, taking into account the transition dynamics. Starting at the U.S. status quo, the optimal tax reform is slightly more progressive than the current system.

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    Bibliographic Info

    Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 10-2012.

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    Length: 45 pages
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:mtl:montec:10-2012

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    Related research

    Keywords: Intergenerational Mobility; Optimal Taxation; Progressive Redistribution; Incomplete Markets;

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