Larger transfers financed with more progressive taxes? On the optimal design of taxes and transfers

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

No 16781, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the optimal joint design of targeted transfers and progressive income taxes. We develop a simple analytical model and demonstrate an optimally negative relation between transfers and income-tax progressivity, due to both efficiency and redistribution concerns. That is, higher transfers should be financed with lower income-tax progressivity. We next quantify the optimal fiscal plan in a rich dynamic model calibrated to the U.S. economy. Transfers should be generous and financed with moderate income-tax progressivity. To redistribute while preserving efficiency, average tax-and-transfer rates should be more progressive than marginal rates. Transfers, even if lump-sum, precisely allow to disentangle average from marginal rates. Targeted transfers further implement non-monotonic marginal rates, but generate only modest additional gains relative to a lump-sum transfer. Quantitatively, the left tail of the income distribution determines the optimal size of the transfer, while the right tail drives the optimal income-tax progressivity.

Keywords: Heterogeneous agents; Fiscal policy; Redistribution; Optimal taxation (search for similar items in EconPapers)
JEL-codes: E21 E62 H21 H23 H53 (search for similar items in EconPapers)
Date: 2021-12
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cepr.org/publications/DP16781 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: On the optimal design of transfers and income-tax progressivity (2022)
Working Paper: Larger transfers financed with more progressive taxes? On the optimal design of taxes and transfers (2021)
Working Paper: Larger transfers financed with more progressive taxes? On the optimal design of taxes and transfers (2021)
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:cpr:ceprdp:16781

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP16781

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().