On the optimal progressivity of the income tax code
By: Juan Carlos Conesa, Dirk Krueger.
Contributors: Krueger, Dirk.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11044; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11044.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Income tax -- United States -- Econometric models.
Description: "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"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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