Social Welfare Effects of Progressive Income Taxation Under Increasing Inequality

Ranđelović, Saša and Vladisavljević, Marko (2020) Social Welfare Effects of Progressive Income Taxation Under Increasing Inequality. Prague Economic Papers, 29 (5). pp. 575-599. ISSN 2336-730X

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Abstract

During the 2008 economic crisis, labour market inactivity, unemployment and work
informality in Serbia rose substantially, triggering a salient increase in Gini-measured
inequality (by 4.3 pp), while income tax progressivity remained very low. Using the microsimulation and utility function estimation techniques on 2007 and 2012 household survey
data for Serbia, we compare the social welfare effects of a hypothetical shift from flat
to progressive taxation, before and after the crisis. We find that a shift from flat to progressive
tax and the consequent behavioural response lead to a reduction in inequality, a rise
in total labour supply and an increase in the overall social welfare in both years. Although
the decrease in inequality is higher in 2012, the overall welfare effects are slightly larger
in 2007, due to the stronger labour supply response and the stronger disutility of work
found in the latter year. This may suggest that a rise in inequality does not per se create
a stronger case for progressive taxation, as the welfare effects are considerably driven
by the structure of income-leisure preferences.

Item Type:	Article
Additional Information:	COBISS.ID=24140553
Uncontrolled Keywords:	optimal income taxation, tax progressivity, inequality, labour supply, social welfare
Research Department:	Welfare Economics
Depositing User:	Jelena Banovic
Date Deposited:	27 Oct 2020 10:12
Last Modified:	27 Oct 2020 12:46
URI:	http://35.240.28.64/id/eprint/1503
Author Links:	[error in script] No links available.

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