Redistributive Policies through Taxation: Theory and Evidence
AbstractIncreasing marginal tax rates and making payments to the poor reduce inequality and introduce savings dis-incentives. Using a heterogeneous agent model with incomplete markets, we show that higher taxes (and transfers) decrease consumption inequality but also mean savings and mean consumption. This demonstrates the trade-off between equity and efficiency. These theoretical predictions are tested by exploiting differences in tax rates across US states. Using two surveys, the Consumer Expenditure Survey and the Current Population Survey, we show that the empirical evidence supports the theory, and that there is a comparatively small fall in efficiency for a given gain in equity associated with higher taxation.
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Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 100.
Date of creation: 01 Jun 2003
Date of revision:
Undiversifiable Earnings Risk; Tax Distortions; Equity; Efficiency; Transfers;
Other versions of this item:
- Charles GRANT & Christos KOULOVATIANOS & Alexander MICHAELIDES & Mario PADULA, 2003. "Redistributive Policies through Taxation: Theory and Evidence," Economics Working Papers ECO2003/13, European University Institute.
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
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