Progressive income taxation and consumption baskets of rich and poor

Mehedi Hasan Oni

Journal of Economic Dynamics and Control, 2023, vol. 157, issue C

Abstract: In this paper, I analyze the implications of differences in consumption baskets across income groups to evaluate the effects of redistributive taxation on efficiency and inequality. To this end, I develop a static multi-sector general equilibrium model incorporating a parametric tax function, non-homothetic consumption preferences, and endogenous labor supply, with varying compositions of skilled and unskilled labor in production across sectors. A calibrated version of the model captures the cross-sectional differences in the compositions of households' consumption baskets in the United States. I find that considering the differences in consumption baskets between high- and low-income households leads to a lower optimal choice of income tax progressivity compared to the conventional approach that ignores this feature of the data.

Keywords: Progressive taxation; Optimal taxation; Inequality; Labor supply; Reallocation; Non-homothetic consumption preference (search for similar items in EconPapers)
JEL-codes: D30 E20 H20 H40 J22 J24 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:157:y:2023:i:c:s0165188923001641

DOI: 10.1016/j.jedc.2023.104758

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