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Optimal taxation and the tradeoff between efficiency and redistribution

George Economides () and Anastasios Rizos ()
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George Economides: Athens University of Economics and Business

No 1701, DEOS Working Papers from Athens University of Economics and Business

Abstract: This paper studies the aggregate and distributional implications of introducing consumption taxes into an otherwise deterministic version of the standard neoclassical growth model with income taxes only and heterogeneity across agents. In particular, the economic agents differ among each other with respect to whether they are allowed to save (in physical capital) or not. Policy is optimally chosen by a benevolent Ramsey government. The main theoretical finding comes to confirm the widespread belief that the introduction of consumption taxes into a model with income taxes only, creates substantial efficiency gains for the economy as whole, but at the cost of higher income inequality. In other words, consumption taxes reduce the progressivity of the tax system, and maybe, from a normative point of view, this result justifies the design of a set of subsidies policies which will aim to outweigh the regressive effects of the otherwise more efficient consumption taxes.

Keywords: Ramsey taxation; heterogeneity; efficiency; inequality (search for similar items in EconPapers)
JEL-codes: H21 H23 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
Date: 2017-06-30
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