On the Optimal Design of Transfers and Income Tax Progressivity

Axelle Ferriere, Philipp Grübener, Gaston Navarro and Oliko Vardishvili

Journal of Political Economy Macroeconomics, 2023, vol. 1, issue 2, 276 - 333

Abstract: We study the optimal design of means-tested transfers and progressive income taxes. In a simple analytical model, we show that adding a transfer to a log-linear tax induces welfare gains almost as large as in the second-best allocation. Transfers allow for more progressive average than marginal tax and transfer rates, achieving redistribution while preserving efficiency. In a rich dynamic model, we quantify the optimal fiscal plan. We use new flexible functions featuring targeted transfers and progressive income taxes, delivering a good empirical fit across the income distribution. Transfers should be larger than currently in the United States and financed with moderate income tax progressivity.

Date: 2023
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Working Paper: On the Optimal Design of Transfers and Income Tax Progressivity (2023)
Working Paper: On the Optimal Design of Transfers and Income Tax Progressivity (2023)
Working Paper: On the optimal design of transfers and income-tax progressivity (2022)
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