On the Optimality of Progressive Income Redistribution

Ozan Bakis and Baris Kaymak

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

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 find that the optimal long-run tax policy is moderately regressive. Regressive taxes lead to higher output and consumption, at the expense of larger after-tax income inequality. Nevertheless, equilibrium effects and the availability of self-insurance via bequests mitigate the impact of regressive taxes on consumption inequality, resulting in improved average welfare overall. We also consider the optimal once-and-for-all change in the tax system, taking into account the transition dynamics. Starting at the U.S. status quo, the optimal tax reform is slightly more progressive than the current system.

Keywords: Intergenerational Mobility; Optimal Taxation; Progressive Redistribution; Incomplete Markets (search for similar items in EconPapers)
JEL-codes: E20 E62 H20 H21 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2012
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Citations: View citations in EconPapers (13)

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http://hdl.handle.net/1866/8855 (application/pdf)

Related works:
Working Paper: On the Optimality of Progressive Income Redistribution (2012)
Working Paper: On the Optimality of Progressive Income Redistribution (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:2012-09

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