On the Optimal Design of Transfers and Income Tax Progressivity

Journal article: We study the optimal design of means-tested transfers and progressive income taxes. In a simple analytical model, we show that adding a transfer to a log-linear tax induces welfare gains almost as large as in the second-best allocation. Transfers allow for more progressive average than marginal tax and transfer rates, achieving redistribution while preserving efficiency. In a rich dynamic model, we quantify the optimal fiscal plan. We use new flexible functions featuring targeted transfers and progressive income taxes, delivering a good empirical fit across the income distribution. Transfers should be larger than currently in the United States and financed with moderate income tax progressivity.

Author(s)

Axelle Ferriere, Philipp Grübener, Gaston Navarro, Oliko Vardishvili

Journal
  • Journal of Political Economy Macroeconomics
Date of publication
  • 2023
Pages
  • 276-333
Version
  • 1
Volume
  • 1