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On the Optimality of Progressive Income Redistribution

  • Ozan Bakis
  • Baris Kaymak

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.

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Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 10-2012.

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Length: 45 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:mtl:montec:10-2012
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