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On the Optimal Design of Transfers and Income Tax Progressivity

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  • Axelle Ferriere
  • Philipp Grübener
  • Gaston Navarro
  • Oliko Vardishvili

Abstract

We study the optimal design of means-tested transfers and progressive income taxes. In a simple analytical model, we show that adding a transfer to a log-linear tax induces welfare gains almost as large as in the second-best allocation. Transfers allow for more progressive average than marginal tax and transfer rates, achieving redistribution while preserving efficiency. In a rich dynamic model, we quantify the optimal fiscal plan. We use new flexible functions featuring targeted transfers and progressive income taxes, delivering a good empirical fit across the income distribution. Transfers should be larger than currently in the United States and financed with moderate income tax progressivity.

Suggested Citation

  • Axelle Ferriere & Philipp Grübener & Gaston Navarro & Oliko Vardishvili, 2023. "On the Optimal Design of Transfers and Income Tax Progressivity," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 1(2), pages 276-333.
  • Handle: RePEc:ucp:jpemac:doi:10.1086/725034
    DOI: 10.1086/725034
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    Cited by:

    1. Chung Tran & Nabeeh Zakariyya, 2023. "Progressive Pension and Optimal Tax Progressivity," ANU Working Papers in Economics and Econometrics 2023-691, Australian National University, College of Business and Economics, School of Economics.

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs

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