Reassessing the efficiency-equity trade-off: progressivity’s impact on growth
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2024-02
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We revisit the efficiency-equity trade-off of optimal tax theory by emphasizing the consequences of increased progressivity on growth. We use an endogenous growth framework that considers both the decision to become a researcher and the effort established entrepreneurs make to improve their products. We find that the optimal level or progressivity is lower than the current one but that welfare gains are moderate – CEV ≈ 0.5%. However, if one disregards the growth impact one would prescribe a substantially higher level of progressivity at significant welfare cost – CEV ≈ −9%.