On the Optimality of Progressive Income Redistribution
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 ﬁnd that the optimal long-run tax policy is moderately regressive. Regressive taxes lead to higher output and consumption, at the expense of larger after-tax income inequality. Nevertheless, equilibrium effects and the availability of self-insurance via bequests mitigate the impact of regressive taxes on consumption inequality, resulting in improved average welfare overall. We also consider the optimal once-and-for-all change in the tax system, taking into account the transition dynamics. Starting at the U.S. status quo, the optimal tax reform is slightly more progressive than the current system.
|Date of creation:||2012|
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