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On the optimal design of transfers and income-tax progressivity

Axelle Ferriere (), Philipp Grübener (), Gaston Navarro () and Oliko Vardishvili ()

No 1350, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study the optimal design of means-tested transfers and progressive income taxes. In a simple analytical model, we demonstrate an optimally negative relation between transfers and income-tax progressivity due to efficiency and redistribution concerns. In a rich dynamic model, we quantify the optimal plan with flexible tax-and-transfer functions. Transfers should be larger than currently in the U.S. and financed with moderate income-tax progressivity. Transfers are key to implement higher progressivity in average than in marginal tax-and-transfer rates, achieving redistribution while preserving efficiency. Quantitatively, the left tail of the income distribution determines optimal transfers, whereas the right tail determines income-tax progressivity.

Keywords: Heterogeneous Agents; Fiscal Policy; Optimal Taxation; Redistribution (search for similar items in EconPapers)
JEL-codes: E21 E62 H21 H23 H53 (search for similar items in EconPapers)
Pages: 52 p.
Date: 2022-08-01
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1350

DOI: 10.17016/IFDP.2022.1350

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