Redistributive Taxation in a Partial Insurance Economy

Kjetil Storesletten, Gianluca Violante and Jonathan Heathcote
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Gianluca Violante: NYU

No 588, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: We explore the optimal progressivity of the income tax system in an incomplete-markets model. Agents value private and public consumption and leisure, and are heterogeneous with respect to innate ability, idiosyncratic shock histories, and preferences. This heterogeneity generates a potential role for public insurance. Agents make education and labor supply choices, save in a risk-free bond, and are able to insure a subset of idiosyncratic risks privately. Equilibrium allocations and social welfare are characterized in closed form, which illuminates the various trade-offs in favor of more or less progressive taxation. In a calibration to the United States, we find that the actual US tax and transfer system is more progressive than the one that maximizes social welfare for a utilitarian planner.

Date: 2012
New Economics Papers: this item is included in nep-dge, nep-ias and nep-pbe
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Related works:
Working Paper: Redistributive Taxation in a Partial-Insurance Economy (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:588

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