Progressive Pension and Optimal Tax Progressivity
Chung Tran and Nabeeh Zakariyya
We examine the extent to which progressivity in the income tax and public pension systems could complement one another. We demonstrate that there is a negative relationship between optimal tax progressivity and pension progressivity. Shifting the social insurance and redistribution roles embedded in the progressive income tax code to a progressive pension system with stricter means-testing rules can yield better overall welfare outcomes. Flattening the income tax code (less tax progressivity) while tightening means-testing rules for pension payments (more pension progressivity) indeed results in larger welfare gains. The optimal design consists of a flat income tax rate and a strict means-tested pension scheme. Overall, redistributive concerns should be addressed directly through more progressive transfers; meanwhile, reducing tax progressivity is important for improving aggregate efficiency.
Health Risk, Insurance and Optimal Progressive Income Taxation
Juergen Jung and Chung Tran
JOURNAL OF THE EUROPEAN ECONOMIC ASSOCIATION, VOL. 21 | OCTOBER 2023
We study the optimal progressivity of personal income taxes in a general equilibrium overlapping generations model where individuals are exposed to idiosyncratic shocks to labor productivity and health status over the lifecycle. Our results—based on a calibration to the US economy—indicate that both, the presence of health risk and the available insurance institutions have a strong effect on the optimal level of tax progressivity. Given the fragmented and non-universal health insurance system in the US, a welfare maximizing income tax system is substantially more progressive than the current US income tax. The higher progressivity provides additional redistribution and social insurance, especially for unhealthy low income individuals who have limited access to health insurance. When exposure to health risk is removed or reduced by introducing more comprehensive health insurance systems, we observe large decreases in the optimal level of income tax progressivity and the optimal tax system resembles findings from the previous literature. These findings highlight the importance of accounting for the unique characteristics of health risk and the design of the health insurance system when characterizing optimal income taxes.
Tax Progressivity in Australia: Facts, Measurements and Estimates
Chung Tran and Nabeeh Zakariyya
ECONOMIC RECORD, VOLUME 77, ISSUE 316, PAGES 45-77 | MARCH 2021
We study trends in progressivity of the Australian personal income tax system after the introduction of a New Tax System (Goods and Services Tax) Act 1999. We employ two methodological approaches: one based on tax liability progression and one based on tax liability distribution. The latter shows a cycle of lesser and greater tax progressivity in Australia between 2000 and 2018. We identify two main drivers of the tax progressivity cycle: lack of automatic indexation and mismatch between the income tax code and the evolution of market income distribution. Active tax policy with frequent adjustments to income brackets, marginal rates and oset levels drive the progressivity level before 2010. Meanwhile, inactive tax policy induces lower levels of tax progressivity after 2010 as the income tax code fails to track the changes in market income distribution. Indexation to inflation can partially mitigate the decline in progressivity; however, it is not a full substitute for a proper tax indexation system with (annual) frequent adjustments. Furthermore, we separate the contributions of taxes and transfers to overall progressivity of the tax and transfer system. We find the redistributive role of transfers is more pronounced.