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Title: Inequality as an externality: Consequences for Tax Design

Citation Type: Miscellaneous

Publication Year: 2020

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Abstract: This paper proposes to treat inequality as an economic externality. Such an externality introduces the societal effects of income inequality into simple welfarist models, wherein these effects are generally omitted. Novel policy consequences are illustrated through an optimal income taxation model; resulting optimal income tax rates become unambiguously more progressive with a negative inequality externality, top optimal tax rates are shown to be particularly susceptible to the inequality externality, and optimal rates above the revenue-maximizing Laffer rate are observed. Our findings indicate that the magnitude of the inequality externality could be a crucial factor in optimal policy design.

Url: https://www.parisschoolofeconomics.eu/docs/stostad-morten/stostad-and-cowell-2020.pdf

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Authors: Nyborg Støstad, Morten; Cowell, Frank

Publisher: Paris School of Economics

Data Collections: IPUMS CPS

Topics: Other, Poverty and Welfare

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