On the Optimality of Progressive Income Redistribution

Markus Poschke, Baris Kaymak and Ozan Bakis

No 837, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: We compute the optimal non-linear tax policy in a dynastic economy with unin- surable risk, where generations are linked by dynastic wealth accumulation and corre- lated incomes. Unlike earlier studies, we find that the optimal tax policy is moderately regressive. Regressive taxes lead to higher output and consumption, at the expense of larger after-tax income inequality. Nevertheless, the availability of self-insurance via bequests, in particular, mitigates the impact of regressive taxes on consumption in- equality, 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. We find, given the current wealth and income distribution in the US, that the optimal tax system is not far from the existing tax schedule.

Date: 2012
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Citations: View citations in EconPapers (24)

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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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