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Transitional Dynamics and the Optimal Progressivity of Income Redistribution

Author

Listed:
  • Ozan Bakis

    (Sabanci University)

  • Baris Kaymak

    (Universite de Montreal)

  • Markus Poschke

    (McGill University)

Abstract

We compute the optimal non-linear tax policy for a dynastic economy with uninsurable risk, where generations are linked by dynastic wealth accumulation and correlated incomes. Unlike earlier studies, we take full account of the welfare distribution along the transition to the new steady state following a once-and-for-all change in the tax system. Findings show that accounting for transitional dynamics leads to a more progressive optimal tax system than one would obtain by only comparing steady states. Starting at the U.S. status quo, the optimal tax reform is a slight to moderate reduction in the progressivity of the tax system, depending on how much the policy maker cares about future generations. (Copyright: Elsevier)

Suggested Citation

  • Ozan Bakis & Baris Kaymak & Markus Poschke, 2015. "Transitional Dynamics and the Optimal Progressivity of Income Redistribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 679-693, July.
  • Handle: RePEc:red:issued:13-232
    DOI: 10.1016/j.red.2014.08.004
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    Cited by:

    1. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2017. "Optimal Tax Progressivity: An Analytical Framework," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1693-1754.
    2. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, Elsevier.
    3. Kirkby, Robert, 2017. "Transition paths for Bewley-Huggett-Aiyagari models: Comparison of some solution algorithms," Working Paper Series 5642, Victoria University of Wellington, School of Economics and Finance.
    4. repec:eee:dyncon:v:83:y:2017:i:c:p:162-174 is not listed on IDEAS
    5. Guner, Nezih & Lopez-Daneri, Martin & Ventura, Gustavo, 2016. "Heterogeneity and Government revenues: Higher taxes at the top?," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 69-85.
    6. Kaymak, Barış & Poschke, Markus, 2016. "The evolution of wealth inequality over half a century: The role of taxes, transfers and technology," Journal of Monetary Economics, Elsevier, vol. 77(C), pages 1-25.
    7. Krueger, Dirk & Ludwig, Alexander, 2013. "On the Optimal Provision of Social Insurance," MEA discussion paper series 201302, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    8. Krueger, Dirk & Ludwig, Alexander, 2016. "On the optimal provision of social insurance: Progressive taxation versus education subsidies in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 77(C), pages 72-98.
    9. Cruz Echevarría, 2015. "Income tax progressivity, growth, income inequality and welfare," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 6(1), pages 43-72, March.
    10. Diego Daruich, 2018. "The Macroeconomic Consequences of Early Childhood Development Policies," Working Papers 2018-010, Human Capital and Economic Opportunity Working Group.
    11. Diego Daruich, 2017. "From Childhood to Adult Inequality: Parental Investments and Early Childhood Development," 2017 Meeting Papers 770, Society for Economic Dynamics.

    More about this item

    Keywords

    Optimal taxation; Intergenerational mobility; Progressive redistribution;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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