TY  - JOUR
AU  - Conesa,Juan Carlos
AU  - Krueger,Dirk
TI  - On the Optimal Progressivity of the Income Tax Code
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11044
PY  - 2005
Y2  - January 2005
UR  - http://www.nber.org/papers/w11044
L1  - http://www.nber.org/papers/w11044.pdf
N1  - Author contact info:
Juan Carlos Conesa
Universitat Autonoma de Barcelona
Department of Economics
Edifici B, Campus Bellaterra
08193 Cerdanyola del Valles, SPAIN
Tel: 34 935813210
Fax: 34 935812012
E-Mail: juancarlos.conesa@uab.es

Dirk Krueger
Department of Economics
University of Pennsylvania
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-6691
Fax: 215/573-2057
E-Mail: dkrueger@econ.upenn.edu
AB  - This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions. 
Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible.
ER  -