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Redistributive Taxation in a Partial Insurance Economy

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  • Kjetil Storesletten

    (FRB Minneapolis)

  • Gianluca Violante

    (NYU)

  • Jonathan Heathcote

    (Federal Reserve Bank of Minneapolis)

Abstract

We explore the optimal progressivity of the income tax system in an incomplete-markets model. Agents value private and public consumption and leisure, and are heterogeneous with respect to innate ability, idiosyncratic shock histories, and preferences. This heterogeneity generates a potential role for public insurance. Agents make education and labor supply choices, save in a risk-free bond, and are able to insure a subset of idiosyncratic risks privately. Equilibrium allocations and social welfare are characterized in closed form, which illuminates the various trade-offs in favor of more or less progressive taxation. In a calibration to the United States, we find that the actual US tax and transfer system is more progressive than the one that maximizes social welfare for a utilitarian planner.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 588.

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Date of creation: 2012
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Handle: RePEc:red:sed012:588

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Cited by:
  1. Marco Del Negro & Fabrizio Perri & Fabiano Schivardi, 2010. "Tax Buyouts," EIEF Working Papers Series 1007, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2010.
    • Marco Del Negro & Fabrizio Perri & Fabiano Schivardi, 2010. "Tax buyouts," Staff Report 441, Federal Reserve Bank of Minneapolis.
    • Marco Del Negro & Fabrizio Perri & Fabiano Schivardi, 2010. "Tax buyouts," NBER Working Papers 15847, National Bureau of Economic Research, Inc.
    • Marco Del Negro & Fabrizio Perri & Fabiano Schivardi, 2010. "Tax buyouts," Staff Reports 467, Federal Reserve Bank of New York.
  2. Krueger, Dirk & Ludwig, Alexander, 2013. "Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation," MEA discussion paper series 13267, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  3. Ozan Bakis & Baris Kaymak, 2012. "On the Optimality of Progressive Income Redistribution," Cahiers de recherche 10-2012, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
  4. Mathias Trabandt & Harald Uhlig, 2006. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," SFB 649 Discussion Papers SFB649DP2006-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Rong Hai, 2013. "The Determinants of Rising Inequality in Health Insurance and Wages: An Equilibrium Model of Workers' Compensation and Health Care Policies," PIER Working Paper Archive 13-019, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. Bagchi, Shantanu, 2013. "Is the Social Security Crisis Really as Bad as We Think?," MPRA Paper 56294, University Library of Munich, Germany, revised May 2014.
  7. Markus Poschke & Baris Kaymak & Ozan Bakis, 2012. "On the Optimality of Progressive Income Redistribution," 2012 Meeting Papers 837, Society for Economic Dynamics.
  8. Marios Karabarbounis, 2013. "Heterogeneity in labor supply elasticity and optimal taxation," Working Paper 13-13, Federal Reserve Bank of Richmond.

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