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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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Cited by:
  1. Roed, Knut & Strom, Steinar, 2002. " Progressive Taxes and the Labour Market: Is the Trade-Off between Equality and Efficiency Inevitable?," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 16(1), pages 77-110, February.
  2. Stuart Adam, 2005. "Measuring the marginal efficiency cost of redistribution in the UK," IFS Working Papers, Institute for Fiscal Studies W05/14, Institute for Fiscal Studies.
  3. Peter Lindert, 2003. "Why The Welfare State Looks Like a Free Lunch," Working Papers, University of California, Davis, Department of Economics 27, University of California, Davis, Department of Economics.
  4. Herwig Immervoll & Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2007. "Welfare reform in European countries: a microsimulation analysis," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 117(516), pages 1-44, 01.
  5. 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.
  6. Nada Eissa & Henrik Jacobsen Kleven & Claus Thustrup Kreiner, 2004. "Evaluation of Four Tax Reforms in the United States: Labor Supply and Welfare Effects for Single Mothers," NBER Working Papers 10935, National Bureau of Economic Research, Inc.
  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, IEF, vol. 160(1), pages 103-120, march.

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