Larger transfers financed with more progressive taxes? On the optimal design of taxes and transfers
Pre-print, Working paper: We study the optimal joint design of targeted transfers and progressive income taxes. We develop a simple analytical model and demonstrate an optimally negative relation between transfers and income-tax progressivity, due to both efficiency and redistribution concerns. That is, higher transfers should be financed with lower income-tax progressivity. We next quantify the optimal fiscal plan in a rich dynamic model calibrated to the U.S. economy. Transfers should be generous and financed with moderate income-tax progressivity. To redistribute while preserving efficiency, average tax-and-transfer rates should be more progressive than marginal rates. Transfers, even if lump-sum, precisely allow to disentangle average from marginal rates. Targeted transfers further implement non-monotonic marginal rates, but generate only modest additional gains relative to a lump-sum transfer. Quantitatively, the left tail of the income distribution determines the optimal size of the transfer, while the right tail drives the optimal income-tax progressivity.
Author(s)
Axelle Ferriere, Philipp Grubener, Gaston Navarro, Oliko Vardishvili
Date of publication
- 2021
Keywords JEL
Keywords
- Heterogeneous Agents
- Fiscal Policy
- Optimal Taxation
- Redistribution
Internal reference
- PSE Working Papers n°2021-66
Pages
- 46 p.
URL of the HAL notice
Version
- 1