Progressive Income Tax
Income Redistribution Policy
Chapter 9 examined optimal taxation from the viewpoint of efficiency. Although this efficiency issue is an important topic of optimal taxation, the optimal tax literature also investigates the equity issue. This chapter examines income redistribution policy among heterogeneous individuals within the same generation.
Needless to say, income inequality is a serious problem in the real economy. As explained in Chap. 1, one of the fundamental functions of public finance is to redistribute income among individuals. The government conducts several measures to cope with this issue by using progressive income taxes and social welfare programs. When there is inequality among individuals, how should a redistribution policy be imposed? Further, what factors are crucial to determine an optimal redistribution policy?
A progressive income tax is the most popular and powerful way to conduct a redistribution policy. However, it may also cause the disincentive effect on labor supply and other economic activities. The optimal degree of redistribution depends upon various economic and social factors, such as value judgments on social inequality, disincentive effects on economic variables, revenue requirement, and the degree of income inequality.