Larger transfers financed with more progressive taxes? On the optimal design of taxes and transfers
Axelle Ferriere,
Philipp Grubener (),
Gaston Navarro and
Oliko Vardishvili ()
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Philipp Grubener: Goethe-Universität Frankfurt am Main
Oliko Vardishvili: Yale University [New Haven]
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Abstract:
We study the optimal joint design of targeted transfers and progressive income taxes. We develop a simple analytical model and demonstrate an optimally negative relation between transfers and income-tax progressivity, due to both efficiency and redistribution concerns. That is, higher transfers should be financed with lower income-tax progressivity. We next quantify the optimal fiscal plan in a rich dynamic model calibrated to the U.S. economy. Transfers should be generous and financed with moderate income-tax progressivity. To redistribute while preserving efficiency, average tax-and-transfer rates should be more progressive than marginal rates. Transfers, even if lump-sum, precisely allow to disentangle average from marginal rates. Targeted transfers further implement non-monotonic marginal rates, but generate only modest additional gains relative to a lump-sum transfer. Quantitatively, the left tail of the income distribution determines the optimal size of the transfer, while the right tail drives the optimal income-tax progressivity.
Keywords: Heterogeneous Agents; Fiscal Policy; Optimal Taxation; Redistribution (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03466762v1
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Working Paper: Larger transfers financed with more progressive taxes? On the optimal design of taxes and transfers (2021) 
Working Paper: Larger transfers financed with more progressive taxes? On the optimal design of taxes and transfers (2021) 
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