Pro-rich Inflation and Optimal Income Taxation

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2021-11-01

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Gürer, Eren
Weichenrieder, Alfons J.

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We study the implications of an increase in the price of necessities, which disproportionally hurts the poor, for optimal income taxation. When the government is utilitarian and disutility from labor supply is linear, the optimal nominal taxes and transfers are unchanged as households supply more labor to secure their consumption expenditures. Quantitative analyses with convex disutility of labor supply reveal that, because of positive labor supply effects, keeping average tax rates constant suffices to optimally react to the asymmetric price shock. The poorest agents increase their labor supply the most. Thus, optimal income tax policy in response to asymmetric price changes does not prevent the disproportional decline in the indirect utility of poorer households.

Subject Keywords

Pro-rich inflation, optimal income taxation, JEL Classification Codes, H21, E31, INEQUALITY, ELASTICITIES, PRICES

URI

https://hdl.handle.net/11511/101741

Journal

PUBLIC FINANCE REVIEW

DOI

https://doi.org/10.1177/10911421221077784

Collections

Department of Economics, Article

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Citation Formats

E. Gürer and A. J. Weichenrieder, “Pro-rich Inflation and Optimal Income Taxation,” PUBLIC FINANCE REVIEW, vol. 49, no. 6, pp. 815–844, 2021, Accessed: 00, 2023. [Online]. Available: https://hdl.handle.net/11511/101741.