Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/119560
Authors: 
Heathcote, Jonathan
Storesletten, Kjetil
Violante, Giovanni L.
Year of Publication: 
2014
Series/Report no.: 
IFS Working Papers W14/27
Abstract: 
What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. At the same time, progressivity reduces incentives to work and to invest in skills, and aggravates the externality associated with valued public expenditures. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preferences, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the externality linked to valued government purchases play quantitatively similar roles in limiting desired progressivity.
Subjects: 
Progressivity
Income Distribution
Skill Investment
Labor Supply
Partial Insurance
Valued Government Expenditures
Welfare
JEL: 
D30
E20
H20
H40
J22
J24
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
740.61 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.