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Unveiling the impact of income taxes on inequality in a HACT model

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  • Parro, Francisco

Abstract

I introduce a tax shock into a “standard” heterogeneous agent model in continuous time (HACT) to quantify the effect of an income tax on inequality. I find that an income tax, collecting 15% of output, reduces the Gini coefficient by up to 16.9% in an economy with a perfect credit market and up to 24.3% in financial autarky. The tax has a modest effect on production labor income inequality, reduces inequality in entrepreneurial income under financial autarky, but raises it when entrepreneurs operate in a perfect credit market. I also explore the effect of the tax on other well-known income inequality measures discussed in the literature.

Suggested Citation

  • Parro, Francisco, 2024. "Unveiling the impact of income taxes on inequality in a HACT model," Journal of Macroeconomics, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:jmacro:v:79:y:2024:i:c:s0164070423000812
    DOI: 10.1016/j.jmacro.2023.103581
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    More about this item

    Keywords

    Inequality; Taxation; Heterogeneous agents;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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