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Inequality and Optimal Redistributive Tax and Transfer Policies

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  • Mr. Howell H Zee

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.

Suggested Citation

  • Mr. Howell H Zee, 1999. "Inequality and Optimal Redistributive Tax and Transfer Policies," IMF Working Papers 1999/060, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1999/060
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    References listed on IDEAS

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    1. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
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    3. Helpman, Elhanan & Sadka, Efraim, 1978. "The optimal income tax : Some comparative statics results," Journal of Public Economics, Elsevier, vol. 9(3), pages 383-393, June.
    4. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059.
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    6. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
    7. Helpman, Elhanan & Sadka, Efraim, 1978. "Optimal Taxation of Full Income," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(1), pages 247-251, February.
    8. Edmund S. Phelps, 1973. "Taxation of Wage Income for Economic Justice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 331-354.
    9. Robert Cooter & Elhanan Helpman, 1974. "Optimal Income Taxation for Transfer Payments Under Different Social Welfare Criteria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 88(4), pages 656-670.
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    Cited by:

    1. Kim, Junghun, 2005. "Tax reform issues in Korea," Journal of Asian Economics, Elsevier, vol. 16(6), pages 973-992, December.
    2. Chu, Ke-young & Davoodi, Hamid & Gupta, Sanjeev, 2003. "Income distribution and tax, and government social spending policies in developing countries," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34918, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    3. Steiner, Susan, 2005. "Decentralisation and Poverty Reduction: A Conceptual Framework for the Economic Impact," GIGA Working Papers 3, GIGA German Institute of Global and Area Studies.
    4. Sterner, Cornelia, 2010. "Ein bedingungsloses Grundeinkommen in Form der negativen Einkommensteuer: Eine soziologische und finanzwissenschaftliche Analyse [An unconditional basic income in the form of the negative income ta," MPRA Paper 39703, University Library of Munich, Germany, revised Jun 2012.
    5. Kanayo K. Ogujiuba, 2022. "Which Demographic Quintile Benefits from Public Health Expenditure in Nigeria: A Marginal Benefit Analysis," Economies, MDPI, vol. 10(10), pages 1-17, October.

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