Seminarios

Abstract

A progressive tax schedule, as it is observed in many developed countries, is usually justified in terms of redistributive purposes; however, when labor markets are frictional, progressive taxation has been shown to have a beneficial effect on the unemployment rate. On the other hand, a more progressive tax schedule discourages individual labor supply and (precautionary) savings, thus potentially reducing capital accumulation and total production. In this paper, I take into account the different effects of a progressive tax and transfer schedule on unemployment, individual labor supply and savings. I consider the progressive tax and transfer schedule in combination with unemployment benefits, which are an additional way to provide public insurance against income drop during unemployment spells. Simple steady state comparisons, based on the utilitarian welfare criterion, point to the desirability of a tax and transfer schedule with a positive degree of progressivity, without calling for additional unemployment insurance: in other words, the welfare criterion calls for a progressive tax schedule combined with a negative income tax at the bottom of the asset distribution. In terms of modelling strategy, I start from the workhorse model of Krusell et al. (2010), which combines the Huggett-Aiyagari framework of heterogeneous agents with matching frictions in the labor market, and I introduce individual labor supply. I also allow for heterogeneity in productivity, as in Lifschitz et al. (2016), as well as in preferences for leisure: the model clarifies that behind the overall welfare effects there is a tension among the low and high productive individuals with respect to the effects of the different policies.