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Larger transfers financed with more progressive taxes? On the optimal design of taxes and transfers

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Philipp Grubener
  • Function : Author
  • PersonId : 1119352
Gaston Navarro
  • Function : Author
  • PersonId : 1119353
Oliko Vardishvili
  • Function : Author
  • PersonId : 1119354

Abstract

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.
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Dates and versions

halshs-03466762 , version 1 (06-12-2021)

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  • HAL Id : halshs-03466762 , version 1

Cite

Axelle Ferriere, Philipp Grubener, Gaston Navarro, Oliko Vardishvili. Larger transfers financed with more progressive taxes? On the optimal design of taxes and transfers. 2021. ⟨halshs-03466762⟩
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