Abstract
This paper analyzes the effects of personal income tax progressivity on long-run economic growth, income inequality and social welfare. The quantitative implications of income tax progressivity increments are illustrated for the US economy under three main headings: individual effects (reduced labor supply and savings, and increased dispersion of tax rates); aggregate effects (lower GDP growth and lower income inequality); and welfare effects (lower dispersion of consumption across individuals and higher leisure levels, but also lower growth of future consumption). The social discount factor proves to be crucial for this third effect: a higher valuation of future generations’ well-being requires a lower level of progressivity. Additionally, if tax revenues are used to provide a public good rather than just being discarded, a higher private valuation of such public goods will also call for a lower level of progressivity.
Highlights
Income tax progressivity helps to attain a more equal distribution of income, wealth and consumption
The numerical experiment run in this paper consists of analyzing the effects of changes in income tax progressivity upon long-term growth when this is based on physical capital accumulation, income inequality, and social welfare for a wide enough range of non-negative values of φ and D
This paper has analyzed the effects of income tax progressivity on long-run economic growth, income inequality and social welfare
Summary
Income tax progressivity helps to attain a more equal distribution of income, wealth and consumption. The model here introduced is, characterized by basic features that, borrowed from previous works, when jointly considered make it depart from those It is an overlapping generations economy, but as opposed to Caucutt et al (2003), households are non-altruistic and have perfect foresight, growth is generated by physical capital accumulation, the progressivity of the income tax applies to labor income, and to capital income, and progressive tax rates are endogenously obtained rather than ex ante imposed. If the social discount factor is high enough (around 1.2), the progressivity level will sharply fall ( still above the benchmark economy value) In this case, the resulting small fall in the annual growth rate of per capita GDP (from 1.92 to 1.87 %) would imply a welfare loss equivalent to a 15.01 % fall in lifetime consumption. An “Appendix” discusses the results under the assumption that the government publicly provides a private consumption good financed with the tax proceeds
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
