Optimal Income tax rates with non-democratic political constraints: case of Armenia

Vardan Baghdasaryan and Hayk Hambardzumyan

No 10405, EcoMod2017 from EcoMod

Abstract: The progressivity of taxes affects social welfare and income inequality. Yet, in Armenia the progressivity of the tax and transfer system, particularly the progressivity of the income taxes, is poorly studied. With this model we look for the progressivity of the income tax function that maximizes utilitarian social welfare, and explore who will be better off or worse off from the fiscal reform that adopts the optimal tax rates. We aim to compute the optimal tax rates for labor income for the Armenian economy based on a quantitative, heterogeneous agent general equilibrium model with incomplete market structure. In this model individuals face uninsured idiosyncratic risk because of productivity shocks. We also incorporate effects that would arise if politicaly viable tax rate was derived as the one supported by "median" voter for developing countries (wealth adjusted median voter). We find that a less progressive tax system increases the social welfare of the society; particularly, average household member gains welfare of 1.11% of steady-state consumption.

Keywords: Armenia; Agent-based modeling; Tax policy (search for similar items in EconPapers)
Date: 2017-07-04
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