Unveiling the impact of income taxes on inequality in a HACT model

Francisco Parro

Journal of Macroeconomics, 2024, vol. 79, issue C

Abstract: I introduce a tax shock into a “standard” heterogeneous agent model in continuous time (HACT) to quantify the effect of an income tax on inequality. I find that an income tax, collecting 15% of output, reduces the Gini coefficient by up to 16.9% in an economy with a perfect credit market and up to 24.3% in financial autarky. The tax has a modest effect on production labor income inequality, reduces inequality in entrepreneurial income under financial autarky, but raises it when entrepreneurs operate in a perfect credit market. I also explore the effect of the tax on other well-known income inequality measures discussed in the literature.

Keywords: Inequality; Taxation; Heterogeneous agents (search for similar items in EconPapers)
JEL-codes: D31 H23 H24 H25 O15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:79:y:2024:i:c:s0164070423000812

DOI: 10.1016/j.jmacro.2023.103581

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