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Welfare improving distributionally neutral tax reforms


  • Mathieu-Bolh, Nathalie


In a new model with incomplete markets, I quantitatively determine tax reforms that are welfare improving, distributionally neutral, and leave the budget balance unchanged in the long run. I consider a new reform. I eliminate capital income taxation and replace it with progressive consumption taxation, consisting of taxing necessities and luxuries at different rates. I compare steady states under various tax regimes. I find that progressive rather than uniform consumption taxation generates higher welfare gains in the long run and during the transition to the steady state. While this type of reform achieves redistribution neutrality only in the long run, it generates welfare gains for the whole population during the transition. These results stay robust when non-homothetic preferences are considered and progressivity in consumption taxation is achieved by subsidizing consumption of the poor. With respect to long term objectives, the choice of a more progressive consumption or labor-income tax system depends on the modelization of preferences. During the transition, a tax reform involving more progressive labor-income taxation generates smaller redistribution effects than any consumption tax reform.

Suggested Citation

  • Mathieu-Bolh, Nathalie, 2010. "Welfare improving distributionally neutral tax reforms," Economic Modelling, Elsevier, vol. 27(5), pages 1253-1268, September.
  • Handle: RePEc:eee:ecmode:v:27:y:2010:i:5:p:1253-1268

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    References listed on IDEAS

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    Cited by:

    1. de Quatrebarbes, Céline & Boccanfuso, Dorothée & Savard, Luc, 2016. "Beyond representative households: The macro–micro impact analysis of VAT designs applied to Niger," Economic Modelling, Elsevier, vol. 57(C), pages 76-92.
    2. Gahramanov, Emin, 2013. "Survival misperception, time inconsistency, and implications for life-cycle saving and welfare," Economic Modelling, Elsevier, vol. 32(C), pages 539-550.


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