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Progressing Towards Efficiency: The Role for Labor Tax Progression in Reforming Social

Author

Listed:
  • Makarski, Krzysztof

    (FAME|GRAPE & Warsaw School of Economics)

  • Tyrowicz, Joanna

    (FAME|GRAPE, University of Warsaw and IZA/LISER)

  • Komada, Oliwia

    (FAME|GRAPE)

Abstract

This paper studies the role for progressive labor income taxation in the context of social security reform. We propose a novel reform that replaces redistributive pensions with a contribution-based system while simultaneously increasing the progressivity of labor income taxation to preserve social insurance. Using a stylized model, we show that the benefit of such reform is derived from the Frisch elasticity of labor supply. For sufficiently high values, the reform can be fiscally neutral and Pareto-improving. We then evaluate the reform in a full general equilibrium model calibrated to the U.S. economy. Quantitative results on the efficiency-insurance trade-offs are in line with our theoretical predictions. In the steady-state, for plausible values of the Frisch elasticity, the fiscal space generated by increased labor supply is sufficient to compensate through lump-sum transfers the loss of pension-based insurance. These results carry over to transition dynamics: the reform yields a Pareto improvement along the transition path. Our findings highlight the potential for tax-based redistribution to replace pension-based insurance.

Suggested Citation

  • Makarski, Krzysztof & Tyrowicz, Joanna & Komada, Oliwia, 2026. "Progressing Towards Efficiency: The Role for Labor Tax Progression in Reforming Social," IZA Discussion Papers 18810, IZA Network @ LISER.
  • Handle: RePEc:iza:izadps:dp18810
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    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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