Optimal Taxes and Transfers with Household Heterogeneity

Boris Chafwehé and Francois Courtoy

No 2021009, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We investigate the properties of optimal fiscal policy in a framework where householdheterogeneity is accounted for. The Ramsey planner chooses (distortionary) labor taxes andtransfers to maximize aggregate welfare in a two-agent economy. We contrast the propertiesof optimal labor taxes in our model to the ones obtained in the representative agent counter-part. We first show that the presence of household heterogeneity introduces an additionalsource of fluctuations in the optimal tax rate, as varying taxes allows the planner to use trans-fers for redistributive purposes. We then show that, depending on the assumptions that aremade on how transfer receipts are distributed among households, and the type of shockshitting the economy, the structure of government bond markets becomes more or less im-portant in shaping the dynamics of the Ramsey allocation. In some cases, the presence oftransfers brings the incomplete markets allocation close to the one in which the planner hasaccess to state-contingent claims. We finally show that the presence of heterogeneity andoptimal transfers helps bring the behaviour of fiscal variables in the Ramsey model closer totheir counterpart in US data.

Keywords: Fiscal policy; Household heterogeneity; Optimal taxation; Transfers (search for similar items in EconPapers)
JEL-codes: E32 E62 H21 H23 H31 (search for similar items in EconPapers)
Date: 2021-04-16
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://sites.uclouvain.be/econ/DP/IRES/2021009.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2021009

Access Statistics for this paper

More papers in LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Place Montesquieu 3, 1348 Louvain-la-Neuve (Belgium). Contact information at EDIRC.
Bibliographic data for series maintained by Virginie LEBLANC ().