Progressing Towards Efficiency: The Role for Labor Tax Progression in Reforming Social

Krzysztof Makarski, Joanna Tyrowicz () and Oliwia Komada
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Krzysztof Makarski: FAME|GRAPE & Warsaw School of Economics
Joanna Tyrowicz: FAME|GRAPE, University of Warsaw and IZA/LISER
Oliwia Komada: FAME|GRAPE

No 18810, IZA Discussion Papers from IZA Network @ LISER

Abstract: This paper studies the role for progressive labor income taxation in the context of social security reform. We propose a novel reform that replaces redistributive pensions with a contribution-based system while simultaneously increasing the progressivity of labor income taxation to preserve social insurance. Using a stylized model, we show that the benefit of such reform is derived from the Frisch elasticity of labor supply. For sufficiently high values, the reform can be fiscally neutral and Pareto-improving. We then evaluate the reform in a full general equilibrium model calibrated to the U.S. economy. Quantitative results on the efficiency-insurance trade-offs are in line with our theoretical predictions. In the steady-state, for plausible values of the Frisch elasticity, the fiscal space generated by increased labor supply is sufficient to compensate through lump-sum transfers the loss of pension-based insurance. These results carry over to transition dynamics: the reform yields a Pareto improvement along the transition path. Our findings highlight the potential for tax-based redistribution to replace pension-based insurance.

Keywords: social security reform; labor income tax; redistribution; insurance; welfare effects (search for similar items in EconPapers)
JEL-codes: C68 E62 H55 J26 (search for similar items in EconPapers)
Date: 2026-07
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Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp18810

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