Virgiliu Midrigan, New York University. "Efficient Redistribution".
Department seminar. Virgiliu Midrigan is William R. Berkley Term Professor of Economics And Business at NYU. He will present the paper "Efficient Redistribution".
What are the most eﬃcient means of redistribution in an unequal economy? We answer this question by characterizing the optimal shape of non-linear income and wealth taxes in a dynamic general equilibrium model with uninsurable idiosyncratic risk. Our analysis reproduces the distribution of income and wealth in the United States and explicitly takes into account the long-lived transition dynamics after policy reforms. We ﬁnd that a uniform ﬂat tax on capital and labor income combined with a lump-sum transfer is nearly optimal. Though allowing for increasing marginal income and wealth taxes raises welfare, the incremental gains are small due to strong behavioral and general equilibrium eﬀects. This result is robust to changing household preferences, the distribution of ability, the planner’s preference for redistribution, as well as to explicitly modeling private business ownership and the ensuing heterogeneity in rates of return.