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A Quantitative Analysis of Optimal Income Redistribution in Anglo-Saxon and Continental Economies

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  • Burkhard Heer
  • Mark Trede

Abstract

We develop a medium-scale overlapping-generations model with endogenous labour supply and skill premium to study optimal income redistribution using progressive labour income taxes and pensions. The model is calibrated to the four countries USA, Great Britain, Italy and Germany which differ substantially in their tax and pension systems, demographics, and skill shares among workers. Optimal pension benefits are proportional to lifetime contributions in all four countries, while the optimal degree of income progressivity varies systematically with country characteristics such as the size of the social security system, demographics or the skill share in the labour force. Optimal income taxes should be more progressive in the United States and Great Britain and much less progressive in the continental countries, Italy and Germany. Population ageing further reduces the optimal extent of income redistribution.

Suggested Citation

  • Burkhard Heer & Mark Trede, 2026. "A Quantitative Analysis of Optimal Income Redistribution in Anglo-Saxon and Continental Economies," CESifo Working Paper Series 12938, CESifo.
    • Handle: RePEc:ces:ceswps:_12938
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    References listed on IDEAS

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    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • 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
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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