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Redistributive Taxation in a Partial Insurance Economy

Listed author(s):
  • Kjetil Storesletten

    (FRB Minneapolis)

  • Gianluca Violante


  • Jonathan Heathcote

    (Federal Reserve Bank of Minneapolis)

We explore the optimal progressivity of the income tax system in an incomplete-markets model. Agents value private and public consumption and leisure, and are heterogeneous with respect to innate ability, idiosyncratic shock histories, and preferences. This heterogeneity generates a potential role for public insurance. Agents make education and labor supply choices, save in a risk-free bond, and are able to insure a subset of idiosyncratic risks privately. Equilibrium allocations and social welfare are characterized in closed form, which illuminates the various trade-offs in favor of more or less progressive taxation. In a calibration to the United States, we find that the actual US tax and transfer system is more progressive than the one that maximizes social welfare for a utilitarian planner.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 588.

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Date of creation: 2012
Handle: RePEc:red:sed012:588
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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