Pro-rich Inflation and Optimal Income Taxation


Guerer E., Weichenrieder A. J.

PUBLIC FINANCE REVIEW, vol.49, no.6, pp.815-844, 2021 (ESCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 49 Issue: 6
  • Publication Date: 2021
  • Doi Number: 10.1177/10911421221077784
  • Journal Name: PUBLIC FINANCE REVIEW
  • Journal Indexes: Emerging Sources Citation Index (ESCI), Scopus, International Bibliography of Social Sciences, ABI/INFORM, Business Source Elite, Business Source Premier, EconLit, PAIS International, Political Science Complete, Public Administration Abstracts, Public Affairs Index, Worldwide Political Science Abstracts
  • Page Numbers: pp.815-844
  • Keywords: Pro-rich inflation, optimal income taxation, JEL Classification Codes, H21, E31, INEQUALITY, ELASTICITIES, PRICES
  • Middle East Technical University Affiliated: No

Abstract

We study the implications of an increase in the price of necessities, which disproportionally hurts the poor, for optimal income taxation. When the government is utilitarian and disutility from labor supply is linear, the optimal nominal taxes and transfers are unchanged as households supply more labor to secure their consumption expenditures. Quantitative analyses with convex disutility of labor supply reveal that, because of positive labor supply effects, keeping average tax rates constant suffices to optimally react to the asymmetric price shock. The poorest agents increase their labor supply the most. Thus, optimal income tax policy in response to asymmetric price changes does not prevent the disproportional decline in the indirect utility of poorer households.