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Please use this identifier to cite or link to this item:
http://hdl.handle.net/10419/25452
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| Title: | | On the optimal progressivity of the income tax code  |
| Authors: | | Conesa, Juan Carlos Krueger, Dirk |
| Issue Date: | | 2005 |
| Series/Report no.: | | CFS Working Paper 2005/10 |
| Abstract: | | 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. |
| Subjects: | | Progressive Taxation Optimal Taxation Flat Taxes Social Insurance Transition |
| JEL: | | E62 H21 H24 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CFS Working Paper Series, Universität Frankfurt a. M.
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