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On the Optimality of Progressive Income Redistribution

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  • Ozan Bakis
  • Baris Kaymak

Abstract

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.

Suggested Citation

  • Ozan Bakis & Baris Kaymak, 2012. "On the Optimality of Progressive Income Redistribution," Cahiers de recherche 10-2012, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  • Handle: RePEc:mtl:montec:10-2012
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Sebastian Dyrda & Marcelo Pedroni, 2015. "Optimal Fiscal Policy in a Model with Uninsurable Idiosyncratic Shocks," Working Papers tecipa-550, University of Toronto, Department of Economics.
    2. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2017. "Optimal Tax Progressivity: An Analytical Framework," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1693-1754.
    3. Röhrs, Sigrid & Winter, Christoph, 2017. "Reducing government debt in the presence of inequality," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 1-20.
    4. Guner, Nezih & Lopez-Daneri, Martin & Ventura, Gustavo, 2016. "Heterogeneity and Government revenues: Higher taxes at the top?," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 69-85.
    5. Omer Acikgoz, 2014. "Transitional Dynamics and Long-Run Optimal Taxation under Incomplete Markets," 2014 Meeting Papers 990, Society for Economic Dynamics.
    6. Alexander Ludwig & Dirk Krueger, 2015. "Optimal Capital and Progressive Labor Income Taxation with Endogenous Schooling Decisions and Intergenerational Transfers," 2015 Meeting Papers 334, Society for Economic Dynamics.
    7. Markus Poschke & Baris Kaymak, 2014. "Macroeconomic Implications of Tax Cuts for the Top Income Groups: 1960 - 2010," 2014 Meeting Papers 1054, Society for Economic Dynamics.
    8. Acikgoz, Omer, 2015. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 73380, University Library of Munich, Germany.
    9. Alexander Ludwig & Dirk Krueger, 2010. "Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation," 2010 Meeting Papers 388, Society for Economic Dynamics.
    10. Kindermann, Fabian & Krueger, Dirk, 2014. "High Marginal Tax Rates on the Top 1%? Lessons from a Life Cycle Model with Idiosyncratic Income Risk," CEPR Discussion Papers 10208, C.E.P.R. Discussion Papers.
    11. Sebastian Dyrda & Marcelo Pedroni, 2015. "Optimal Fiscal Policy in a Model with Uninsurable Idiosyncratic Shocks," Working Papers tecipa-549, University of Toronto, Department of Economics.
    12. Slavik, Ctirad & Yazici, Hakki, 2015. "Determinants of Wage and Earnings Inequality in the United States," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113021, Verein für Socialpolitik / German Economic Association.
    13. Sebastian Dyrda & Benjamin Pugsley, 2018. "Taxes, Regulations of Businesses and Evolution of Income Inequality in the US," 2018 Meeting Papers 318, Society for Economic Dynamics.
    14. Acikgoz, Omer, 2013. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 50160, University Library of Munich, Germany.
    15. Markus Poschke & Baris Kaymak, 2015. "The evolution of wealth inequality over half a century: the role of skills, taxes and institutions," 2015 Meeting Papers 967, Society for Economic Dynamics.
    16. Benjamin Pugsley & Sebastian Dyrda, 2017. "Taxes, Regulations of Businesses and Evolution of Income Inequality in the US," 2017 Meeting Papers 1463, Society for Economic Dynamics.
    17. Kindermann, Fabian & Krueger, Dirk, 2014. "High marginal tax rates on the top 1%?," CFS Working Paper Series 473, Center for Financial Studies (CFS).

    More about this item

    Keywords

    Intergenerational Mobility; Optimal Taxation; Progressive Redistribution; Incomplete Markets;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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