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Progressive income taxation and consumption baskets of rich and poor

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  • Oni, Mehedi Hasan

Abstract

In this paper, I analyze the implications of differences in consumption baskets across income groups to evaluate the effects of redistributive taxation on efficiency and inequality. To this end, I develop a static multi-sector general equilibrium model incorporating a parametric tax function, non-homothetic consumption preferences, and endogenous labor supply, with varying compositions of skilled and unskilled labor in production across sectors. A calibrated version of the model captures the cross-sectional differences in the compositions of households' consumption baskets in the United States. I find that considering the differences in consumption baskets between high- and low-income households leads to a lower optimal choice of income tax progressivity compared to the conventional approach that ignores this feature of the data.

Suggested Citation

  • Oni, Mehedi Hasan, 2023. "Progressive income taxation and consumption baskets of rich and poor," Journal of Economic Dynamics and Control, Elsevier, vol. 157(C).
    • Handle: RePEc:eee:dyncon:v:157:y:2023:i:c:s0165188923001641
    DOI: 10.1016/j.jedc.2023.104758
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    More about this item

    Keywords

    Progressive taxation; Optimal taxation; Inequality; Labor supply; Reallocation; Non-homothetic consumption preference;
    All these keywords.

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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