Working Paper: NBER ID: w7132
Authors: Roland B. Nabou
Abstract: This paper studies the effects of progressive income taxes and education finance in a dynamic heterogeneous agent economy. Such redistributive policies entail distortions to labor supply and savings, but also serve as partial substitutes for missing credit and insurance markets. The resulting tradeoffs for growth and efficiency are explored, both theoretically and quantitatively, in a model which yields complete analytical solutions. Progressive education finance always leads to higher income growth than taxes and transfers, but at the cost of lower insurance. Overall efficiency is assessed using a new measure which properly reflects aggregate resources and idiosyncratic risks but, unlike a standard social welfare function, does not reward equality per se. Simulations using empirical parameter estimates show that the efficiency costs and benefits of redistribution are generally of the same order of magnitude, resulting in reasonable values for the optimal rates. Aggregate income and aggregate welfare provide only very crude lower and upper bounds around the true efficiency tradeoff.
Keywords: No keywords provided
JEL Codes: D31; E62; D63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| progressive education finance (I22) | higher income growth (O49) |
| taxes and transfers (H29) | lower income growth (F62) |
| marginal tax rate (H21) | aggregate income (E10) |
| marginal tax rate (H21) | welfare (I38) |
| progressive education finance (I22) | taxes and transfers (H29) |