Optimal Taxation and the Tradeoff Between Efficiency and Redistribution

Authors

  • George Economides Athens University of Economics and Business, Athens, Greece and CESifo Munich, Germany
  • Anastasios Rizos Athens University of Economics and Business, Athens, Greece

DOI:

https://doi.org/10.15353/rea.v10i1.1506

Abstract

This paper studies the aggregate and distributional implications of introducing consumption taxes into an otherwise deterministic version of the standard neoclassical growth model with income taxes only and heterogeneity across agents. In particular, the economic agents differ among each other with respect to whether they are allowed to save (in physical capital) or not. Policy is optimally chosen by a benevolent Ramsey government. The main theoretical finding comes to confirm the widespread belief that the introduction of consumption taxes into a model with income taxes only, creates substantial efficiency gains for the economy as whole, but at the cost of higher income inequality. In other words, consumption taxes reduce the progressivity of the tax system, and maybe, from a normative point of view, this result justifies the design of a set of subsidies policies which will aim to outweigh the regressive effects of the otherwise more efficient consumption taxes.

 

Author Biographies

George Economides, Athens University of Economics and Business, Athens, Greece and CESifo Munich, Germany

Anastasios Rizos, Athens University of Economics and Business, Athens, Greece

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Published

2018-01-07

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Section

Articles