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The Efficiency Cost of Increased Progressivity

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  • Robert K. Triest

Abstract

Increases in income tax progressivity generally entail some efficiency cost due to increased distortion of individuals' labor supply decisions. This paper quantifies the magnitude of the efficiency cost of several policies which would increase the progressivity of the U.S. individual income tax. The analysis differs from previous work on this topic in allowing for complex nonlinear tax schedules similar to those which actually exist. The efficiency cost of increased progressivity is found to vary considerably with the type of tax reform considered. Expanding the earned income tax credit (EITC) is found to be a particularly efficient means of increasing progressivity. Using the labor supply parameters I consider most reasonable, I find that the efficiency cost of expanding the EITC financed by increased tax rates in the intermediated brackets is less than 20 cents per dollar transferred from the upper income groups to the lower income groups.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4535.

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Date of creation: Nov 1993
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Publication status: published as Slemrod, Joel. Tax progressivity and income inequality. Cambridge; New York and Melbourne: Cambridge University Press, 1994.
Handle: RePEc:nbr:nberwo:4535

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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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Cited by:
  1. R. H. Haveman & J. K. Scholz, . "The Clinton welfare reform plan: Will it end poverty as we know it," Institute for Research on Poverty Discussion Papers 1037-94, University of Wisconsin Institute for Research on Poverty.
  2. Immervoll, Herwig & Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup & Saez, Emmanuel, 2004. "Welfare reform in European countries: a micro-simulation analysis," EUROMOD Working Papers EM1/04, EUROMOD at the Institute for Social and Economic Research.
  3. Peter Lindert, 2003. "Why The Welfare State Looks Like a Free Lunch," Working Papers 27, University of California, Davis, Department of Economics.
  4. Eissa, Nada & Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2008. "Evaluation of four tax reforms in the United States: Labor supply and welfare effects for single mothers," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 795-816, April.
  5. Roed,K. & Strom,S., 1999. "Progressive taxes and the labour market : is the trade-off between equality and efficiency inevitable?," Memorandum 19/1999, Oslo University, Department of Economics.
  6. Stuart Adam, 2005. "Measuring the marginal efficiency cost of redistribution in the UK," IFS Working Papers W05/14, Institute for Fiscal Studies.
  7. Nuria Badenes Plá & Julio López Laborda, 2002. "Efectos sobre la renta disponible y el bienestar de la deducción en el IRPF por rentas ganadas," Hacienda Pública Española, IEF, vol. 160(1), pages 103-120, march.

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