IDEAS home Printed from https://ideas.repec.org/a/ren/journl/v10y2018i1p1-43.html
   My bibliography  Save this article

Optimal Taxation and the Tradeoff Between Efficiency and Redistribution

Author

Listed:
  • George Economides

    (Athens University of Economics and Business and CESifo)

  • Anastasios Rizos

    ("Athens University of Economics and Business and Economic Research Division, Alpha Bank ")

Abstract

"This paper studies the aggregate and distributional implications of introducing consumption taxes into an otherwise deterministic version of the standard neoclassical growth model with income taxes only and heterogeneity across agents. In particular, the economic agents differ among each other with respect to whether they are allowed to save (in physical capital) or not. Policy is optimally chosen by a benevolent Ramsey government. The main theoretical finding comes to confirm the widespread belief that the introduction of consumption taxes into a model with income taxes only, creates substantial efficiency gains for the economy as whole, but at the cost of higher income inequality. In other words, consumption taxes reduce the progressivity of the tax system, and maybe, from a normative point of view, this result justifies the design of a set of subsidies policies which will aim to outweigh the regressive effects of the otherwise more efficient consumption taxes."

Suggested Citation

  • George Economides & Anastasios Rizos, 2018. "Optimal Taxation and the Tradeoff Between Efficiency and Redistribution," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 10(1), pages 1-43, January.
    • Handle: RePEc:ren:journl:v:10:y:2018:i:1:p:1-43
    as

    Download full text from publisher

    File URL: http://www.rofea.org/index.php?journal=journal&page=article&op=view&path%5B%5D=367&path%5B%5D=172
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Persson, Torsten & Tabellini, Guido, 1994. "Representative democracy and capital taxation," Journal of Public Economics, Elsevier, vol. 55(1), pages 53-70, September.
    2. Laczó, Sarolta & Rossi, Raffaele, 2020. "Time-consistent consumption taxation," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 194-220.
    3. ColemanII, Wilbur John, 2000. "Welfare and optimum dynamic taxation of consumption and income," Journal of Public Economics, Elsevier, vol. 76(1), pages 1-39, April.
    4. Konstantinos Angelopoulos & Jim Malley & Apostolis Philippopoulos, 2011. "Time-consistent Fiscal Policy under Heterogeneity: Conflicting or Common Interests?," CESifo Working Paper Series 3444, CESifo.
    5. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
    6. George Economides & Apostolis Philippopoulos, 2012. "Are User Fees Really Regressive?," CESifo Working Paper Series 3875, CESifo.
    7. Isabel Correia, 2010. "Consumption Taxes and Redistribution," American Economic Review, American Economic Association, vol. 100(4), pages 1673-1694, September.
    8. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    9. Lansing, Kevin J., 1999. "Optimal redistributive capital taxation in a neoclassical growth model," Journal of Public Economics, Elsevier, vol. 73(3), pages 423-453, September.
    10. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
    11. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
    12. Martin, Fernando M., 2010. "Markov-perfect capital and labor taxes," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 503-521, March.
    13. Krusell, Per, 2002. "Time-consistent redistribution," European Economic Review, Elsevier, vol. 46(4-5), pages 755-769, May.
    14. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    15. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
    16. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 93-107, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. George Economides & Anastasios Rizos, 2021. "Optimal taxation: full-commitment versus time-consistent equilibrium," Economic Change and Restructuring, Springer, vol. 54(3), pages 717-753, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Koskela Erkki & Thadden Leopold von, 2008. "Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective," German Economic Review, De Gruyter, vol. 9(2), pages 135-159, May.
    2. George Economides & Apostolis Philippopoulos & Anastasios Rizos, 2020. "Optimal tax policy under tax evasion," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(2), pages 339-362, April.
    3. George Economides & Anastasios Rizos, 2021. "Optimal taxation: full-commitment versus time-consistent equilibrium," Economic Change and Restructuring, Springer, vol. 54(3), pages 717-753, August.
    4. George Economides & Apostolis Philippopoulos, 2012. "Are User Fees Really Regressive?," CESifo Working Paper Series 3875, CESifo.
    5. Bonnet, Odran & Chapelle, Guillaume & Trannoy, Alain & Wasmer, Etienne, 2021. "Land is back, it should be taxed, it can be taxed," European Economic Review, Elsevier, vol. 134(C).
    6. Konstantinos Angelopoulos & Jim Malley & Apostolis Philippopoulos, 2011. "Time-consistent Fiscal Policy under Heterogeneity: Conflicting or Common Interests?," CESifo Working Paper Series 3444, CESifo.
    7. Vasilev Aleksandar, 2018. "Optimal Fiscal Policy with Utility-Enhancing Government Spending, Consumption Taxation and a Common Income Tax Rate: The Case of Bulgaria," Review of Economics, De Gruyter, vol. 69(1), pages 43-58, April.
    8. Ge Jin & Bing Zhang, 2024. "Optimal fiscal policy with a balanced-budget restriction: revisiting Chamley and Barro," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(2), pages 454-485, April.
    9. Arefiev, Nikolay & Baron, Tatyana, 2006. "Capital Taxation and Rent Seeking," MPRA Paper 9988, University Library of Munich, Germany.
    10. Valentinyi, Ákos, 2001. "A tőkejövedelem optimális adóztatása [The optimal taxation of capital income]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 459-479.
    11. Alberto Petrucci, 2007. "Optimal Taxation of Capital Income in Models with Endogenous Fertility," Development Working Papers 228, Centro Studi Luca d'Agliano, University of Milano.
    12. Gebhard Kirchgässner, 2004. "Die Bedeutung der Körperschaftssteuer: Theoretische Überlegungen, die internationale Entwicklung und die Situation in der Schweiz," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 59(03), pages 239-272, September.
    13. Guo, Jang-Ting & Lansing, Kevin J., 1999. "Optimal taxation of capital income with imperfectly competitive product markets," Journal of Economic Dynamics and Control, Elsevier, vol. 23(7), pages 967-995, June.
    14. Zhu, Xiaodong, 1995. "Endogenous capital utilization, investor's effort, and optimal fiscal policy," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 655-677, December.
    15. Tapio Palokangas, 2014. "Optimal Capital Taxation, Labour Unions, and the Hold-Up Problem," LABOUR, CEIS, vol. 28(4), pages 359-375, December.
    16. repec:spo:wpmain:info:hdl:2441/56k383m9o9kpb1g6f8rvv74ok is not listed on IDEAS
    17. Thomas I. Renström & Luca Spataro, 2021. "Optimal taxation in an endogenous growth model with variable population and public expenditure," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(4), pages 639-659, August.
    18. Jiang Wei, 2019. "Optimal taxation under equilibrium unemployment and economic profits," The B.E. Journal of Macroeconomics, De Gruyter, vol. 19(1), pages 1-21, January.
    19. Nicolas Coeurdacier, 2012. "The international taxation of capital," 2012 Meeting Papers 440, Society for Economic Dynamics.
    20. Angelopoulos, Konstantinos & Fernandez, Bernardo X. & Malley, James R., 2010. "The Distributional Consequences of Supply-Side Reforms in General Equilibrium," SIRE Discussion Papers 2010-85, Scottish Institute for Research in Economics (SIRE).
    21. Saez, Emmanuel & Stantcheva, Stefanie, 2018. "A simpler theory of optimal capital taxation," Journal of Public Economics, Elsevier, vol. 162(C), pages 120-142.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ren:journl:v:10:y:2018:i:1:p:1-43. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dr. Jerzy (Jurek) Konieczny (email available below). General contact details of provider: http://www.rcfea.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.