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On the Optimality of Progressive Income Redistribution

  • Markus Poschke

    (McGill)

  • Baris Kaymak

    (Universite de Montreal)

  • Ozan Bakis

    (Galatasaray University Economic Research Center (GIAM),)

We compute the optimal non-linear tax policy in a dynastic economy with unin- surable risk, where generations are linked by dynastic wealth accumulation and corre- lated incomes. Unlike earlier studies, we find that the optimal tax policy is moderately regressive. Regressive taxes lead to higher output and consumption, at the expense of larger after-tax income inequality. Nevertheless, the availability of self-insurance via bequests, in particular, mitigates the impact of regressive taxes on consumption in- equality, 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. We find, given the current wealth and income distribution in the US, that the optimal tax system is not far from the existing tax schedule.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 837.

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Date of creation: 2012
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Handle: RePEc:red:sed012:837
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