On the Optimal Progressivity of the Income Tax Code

Juan Carlos Conesa and Dirk Krueger

No 11044, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible.

JEL-codes: E62 H21 H24 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pub
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as Conesa, Juan Carlos & Krueger, Dirk, 2006. "On the optimal progressivity of the income tax code," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1425-1450, October.

Downloads: (external link)
http://www.nber.org/papers/w11044.pdf (application/pdf)

Related works:
Working Paper: On the Optimal Progressivity of the Income Tax Code (2015)
Journal Article: On the optimal progressivity of the income tax code (2006)
Working Paper: On the Optimal Progressivity of the Income Tax Code (2005)
Working Paper: On the Optimal Progressivity of the Income Tax Code (2002)
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:nbr:nberwo:11044

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w11044

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().