On the optimal design of transfers and income-tax progressivity

Axelle Ferriere, Philipp Grübener (), Gaston Navarro and Oliko Vardishvili ()

No 1350, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study the optimal design of means-tested transfers and progressive income taxes. In a simple analytical model, we demonstrate an optimally negative relation between transfers and income-tax progressivity due to efficiency and redistribution concerns. In a rich dynamic model, we quantify the optimal plan with flexible tax-and-transfer functions. Transfers should be larger than currently in the U.S. and financed with moderate income-tax progressivity. Transfers are key to implement higher progressivity in average than in marginal tax-and-transfer rates, achieving redistribution while preserving efficiency. Quantitatively, the left tail of the income distribution determines optimal transfers, whereas the right tail determines income-tax progressivity.

Keywords: Heterogeneous Agents; Fiscal Policy; Optimal Taxation; Redistribution (search for similar items in EconPapers)
JEL-codes: E21 E62 H21 H23 H53 (search for similar items in EconPapers)
Pages: 52 p.
Date: 2022-08-01
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: On the Optimal Design of Transfers and Income Tax Progressivity (2023)
Working Paper: On the Optimal Design of Transfers and Income Tax Progressivity (2023)
Working Paper: On the Optimal Design of Transfers and Income Tax Progressivity (2023)
Working Paper: Larger transfers financed with more progressive taxes? On the optimal design of taxes and transfers (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1350

DOI: 10.17016/IFDP.2022.1350

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