Progressive Pension and Optimal Tax Progressivity

Chung Tran and Nabeeh Zakariyya

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: We examine the extent to which progressivity in the income tax and public pension systems could complement one another. We demonstrate that there is a negative relationship between optimal tax progressivity and pension progressivity. Shifting the social insurance and redistribution roles embedded in the progressive income tax code to a progressive pension system with stricter means-testing rules can yield better overall welfare outcomes. Flattening the income tax code (less tax progressivity) while tightening means-testing rules for pension payments (more pension progressivity) indeed results in larger welfare gains. The optimal design consists of a flat income tax rate and a strict means-tested pension scheme. Overall, redistributive concerns should be addressed directly through more progressive transfers; meanwhile, reducing tax progressivity is important for improving aggregate efficiency.

Keywords: Taxation; age pension; tax progressivity; income dynamics; inequality; Suits index; heterogeneity; dynamic general equilibrium (search for similar items in EconPapers)
JEL-codes: E62 H24 H31 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-age, nep-dge, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2023-691

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