Transitional Dynamics and the Optimal Progressivity of Income Redistribution

Ozan Bakis, Baris Kaymak and Markus Poschke

Review of Economic Dynamics, 2015, vol. 18, issue 3, 679-693

Abstract: We compute the optimal non-linear tax policy for a dynastic economy with uninsurable risk, where generations are linked by dynastic wealth accumulation and correlated incomes. Unlike earlier studies, we take full account of the welfare distribution along the transition to the new steady state following a once-and-for-all change in the tax system. Findings show that accounting for transitional dynamics leads to a more progressive optimal tax system than one would obtain by only comparing steady states. Starting at the U.S. status quo, the optimal tax reform is a slight to moderate reduction in the progressivity of the tax system, depending on how much the policy maker cares about future generations. (Copyright: Elsevier)

Keywords: Optimal taxation; Intergenerational mobility; Progressive redistribution (search for similar items in EconPapers)
JEL-codes: E62 H21 H24 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (46)

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DOI: 10.1016/j.red.2014.08.004

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