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The long run effects of changes in tax progressivity

  • Carroll, Daniel R.
  • Young, Eric R.

This paper compares the steady-state outcomes of revenue-neutral changes to the progressivity of the tax schedule. Our economy features heterogeneous households who differ in their preferences and permanent labor productivities, but it does not have idiosyncratic risk. We find that increases in the progressivity of the tax schedule are associated with long-run distributions with greater aggregate income, wealth, and labor input. Average hours generally declines as the tax schedule becomes more progressive implying that the economy substitutes away from less-productive workers toward more-productive workers. Finally, as progressivity increases, income inequality is reduced and wealth inequality rises. Many of these results are qualitatively different than those found in models with idiosyncratic risk, and therefore suggest closer attention should be paid to modeling the insurance opportunities of households.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 9 (September)
Pages: 1451-1473

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:9:p:1451-1473
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Conesa, Juan Carlos & Kitao, Sagiri & Krueger, Dirk, 2006. "Taxing Capital? Not a Bad Idea After All!," CEPR Discussion Papers 5929, C.E.P.R. Discussion Papers.
  2. DAVILA, Julio & HONG, Jay H. & KRUSELL, Per & RIOS-RULL, José-Victor, . "Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks," CORE Discussion Papers RP -2463, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  8. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
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  11. Alejandro Badel & Mark Huggett, 2014. "Interpreting Life Cycle Inequality Patterns as an Efficient Allocation: Mission Impossible?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 613-629, October.
  12. Javier Diaz-Gimenez & Josep Pijoan-Mas, 2006. "Flat Tax Reforms in the U.S.: a Boon for the Income Poor," Computing in Economics and Finance 2006 400, Society for Computational Economics.
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  14. Kakwani, Nanok C, 1977. "Measurement of Tax Progressivity: An International Comparison," Economic Journal, Royal Economic Society, vol. 87(345), pages 71-80, March.
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  16. Emmanuel Saez, 2002. "Optimal Progressive Capital Income Taxes in the Infinite Horizon Model," NBER Working Papers 9046, National Bureau of Economic Research, Inc.
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