Optimal Fiscal Reform with Many Taxes

Abstract

We study the optimal one-shot tax reform in the standard incomplete markets model where households differ in their wealth, earnings, permanent labor skill, and age. The government can provide transfers by raising tax revenue and has several tax instruments at its disposal: a flat capital income tax, a flat consumption tax, and a non-linear labor income tax. The optimal fiscal policy funds a transfer that is nearly 50 percent of GDP through a combination of very high taxes on consumption and capital income. The labor tax schedule has a high average rate but is also moderately progressive. We find an identical outcome when policy is instead determined by majority voting. Finally, we offer suggestive empirical evidence that households’ preferences for tax and redistribution are more strongly associated with political identity than economic status.

On the Distributional Effects of International Tariffs

“…An important difference between our paper and Kindermann and Krueger ( 2022) is that we permit lumpsum transfers, which increase the ability of the government to provide both redistribution and insurance. Papers that model direct transfers like Ferriere et al (2022) andCarroll et al (2023), or operationalize them through UBI, such as Daruich and Fernández (2020) and Luduvice (2021), find even greater welfare gains for initial generations.…”