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On the Optimality of Progressive Income Redistribution

Author

Listed:
  • Markus Poschke

    (McGill)

  • Baris Kaymak

    (Universite de Montreal)

  • Ozan Bakis

    (Galatasaray University Economic Research Center (GIAM),)

Abstract

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.

Suggested Citation

  • Markus Poschke & Baris Kaymak & Ozan Bakis, 2012. "On the Optimality of Progressive Income Redistribution," 2012 Meeting Papers 837, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:837
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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. Cristina Arellano & Yan Bai, 2014. "Renegotiation Policies in Sovereign Defaults," American Economic Review, American Economic Association, pages 94-100.
    3. repec:oup:qjecon:v:132:y:2017:i:4:p:1693-1754. is not listed on IDEAS
    4. Röhrs, Sigrid & Winter, Christoph, 2017. "Reducing government debt in the presence of inequality," Journal of Economic Dynamics and Control, Elsevier, pages 1-20.
    5. Guner, Nezih & Lopez-Daneri, Martin & Ventura, Gustavo, 2016. "Heterogeneity and Government revenues: Higher taxes at the top?," Journal of Monetary Economics, Elsevier, pages 69-85.
    6. Omer Acikgoz, 2014. "Transitional Dynamics and Long-Run Optimal Taxation under Incomplete Markets," 2014 Meeting Papers 990, Society for Economic Dynamics.
    7. Ruediger Bachmann & Peter Zorn, 2013. "What Drives Aggregate Investment?," CESifo Working Paper Series 4218, CESifo Group Munich.
    8. 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.
    9. Acikgoz, Omer, 2015. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 73380, University Library of Munich, Germany.
    10. Khalmetski, Kiryl & Ockenfels, Axel & Werner, Peter, 2015. "Surprising gifts: Theory and laboratory evidence," Journal of Economic Theory, Elsevier, pages 163-208.
    11. Stacey H. Chen & Yen-Chien Chen & Jin-Tan Liu, 2014. "The Impact of Family Composition on Educational Achievement," NBER Working Papers 20443, National Bureau of Economic Research, Inc.
    12. 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.
    13. 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.
    14. 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.
    15. 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.
    16. Acikgoz, Omer, 2013. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 50160, University Library of Munich, Germany.
    17. 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.
    18. Kindermann, Fabian & Krueger, Dirk, 2014. "High marginal tax rates on the top 1%?," CFS Working Paper Series 473, Center for Financial Studies (CFS).
    19. 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.

    More about this item

    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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