Inequality and Optimal Redistributive Tax and Transfer Policies

29 Pages Posted: 13 Feb 2006

Date Written: April 1999

Abstract

This paper explores the revenue-raising aspect of progressive taxation and derives, on the basis of a simple model, the optimal degree of tax progressivity where the tax revenue is used exclusively to finance (perfectly) targeted transfers to the poor. The paper shows that not only would it be optimal to finance the targeted transfers with progressive taxation, but that the optimal progressivity increases unambiguously with growing income inequality. This conclusion holds up under different assumptions about the efficiency cost of taxation and society`s aversion to inequality.

Keywords: inequality, progressive taxation, optimal taxation, transfer policy

JEL Classification: H21, H53

Suggested Citation

Zee, Howell H., Inequality and Optimal Redistributive Tax and Transfer Policies (April 1999). IMF Working Paper No. 99/60, Available at SSRN: https://ssrn.com/abstract=880587

Howell H. Zee (Contact Author)

Xiamen University ( email )

Xiamen, Fujian 361005
China

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