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Pro-rich Inflation and Optimal Income Taxation

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  • Eren Gürer
  • Alfons J. Weichenrieder

Abstract

We study the implications of an increase in the price of necessities, which disproportionally hurts the poor, for optimal income taxation. When the government is utilitarian and disutility from labor supply is linear, the optimal nominal taxes and transfers are unchanged as households supply more labor to secure their consumption expenditures. Quantitative analyses with convex disutility of labor supply reveal that, because of positive labor supply effects, keeping average tax rates constant suffices to optimally react to the asymmetric price shock. The poorest agents increase their labor supply the most. Thus, optimal income tax policy in response to asymmetric price changes does not prevent the disproportional decline in the indirect utility of poorer households.

Suggested Citation

  • Eren Gürer & Alfons J. Weichenrieder, 2021. "Pro-rich Inflation and Optimal Income Taxation," Public Finance Review, , vol. 49(6), pages 815-844, November.
    • Handle: RePEc:sae:pubfin:v:49:y:2021:i:6:p:815-844
    DOI: 10.1177/10911421221077784
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    More about this item

    Keywords

    Pro-rich inflation; optimal income taxation; JEL Classification Codes; H21; E31;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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