EconPapers    
Economics at your fingertips  
 

On the Optimal Progressivity of the Income Tax Code

Juan Carlos Conesa and Dirk Krueger

No 4, Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) from Centro de Altisimos Estudios Rios Perez (CAERP)

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 o¤ against the e¢ciency loss arising from distorting endogenous labor supply and capital accumulation decisions. A determination of the optimal progressivity of the income tax code therefore calls for a quantitative exploration. 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 19.5% and a fixed deduction of about $3,700: The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 0.4% 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, however, that a majority of the population currently alive would suffer welfare losses, calling into question the political feasibility of such fundamental income tax reform.

Keywords: Progressive Taxation; Optimal Taxation; Social Insurance; Transition (search for similar items in EconPapers)
JEL-codes: E62 H21 H24 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2002-06
New Economics Papers: this item is included in nep-dge
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.ssc.upenn.edu/~vr0j/caerp/WPapers/optprtaxes.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Working Paper: On the Optimal Progressivity of the Income Tax Code (2015) Downloads
Journal Article: On the optimal progressivity of the income tax code (2006) Downloads
Working Paper: On the Optimal Progressivity of the Income Tax Code (2005) Downloads
Working Paper: On the Optimal Progressivity of the Income Tax Code (2005) Downloads
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:cae:caerpp:4

Access Statistics for this paper

More papers in Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) from Centro de Altisimos Estudios Rios Perez (CAERP) Contact information at EDIRC.
Bibliographic data for series maintained by Jose-Victor Rios-Rull ().

 
Page updated 2025-03-19
Handle: RePEc:cae:caerpp:4