On the optimal progressivity of the income tax code
- 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 off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions. 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 17:2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1:7% 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 that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible. JEL Klassifikation: E62, H21, H24 .
Author: | Juan Carlos Conesa, Dirk KruegerORCiDGND |
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URN: | urn:nbn:de:hebis:30-10855 |
Parent Title (German): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2005,10 |
Series (Serial Number): | CFS working paper series (2005, 10) |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2005 |
Year of first Publication: | 2005 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2005/06/13 |
Tag: | Flat Taxes; Optimal Taxation; Progressive Taxation; Social Insurance; Transition |
GND Keyword: | Einkommensteuer; Steuerprogression |
Issue: | March 17, 2005 |
HeBIS-PPN: | 197307027 |
Institutes: | Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Licence (German): | Deutsches Urheberrecht |