Numerical Simulation of Reaching a Steady State: Effects of Using Progressive Income Tax and Public Assistance

Harashima, Taiji (2025): Numerical Simulation of Reaching a Steady State: Effects of Using Progressive Income Tax and Public Assistance.

Abstract

In a heterogeneous population, a steady state cannot necessarily be guaranteed unless a government appropriately intervenes. I numerically simulate whether a steady state can be reached by means of progressive income taxes and public assistance in the case that households are heterogeneous in probabilities of obtaining persistent rent incomes. Simulation results indicate that, in many cases, a steady state can be reached, but at the same time a high level of economic inequality is generated. This occurs because progressive income taxes can “confiscate” persistent rent incomes, but they cannot compensate for the extracted economic resources resulting from rent incomes. Simulation results also indicate that large-scale public assistance is needed to reduce inequality, but it will be difficult to actually implement due to difficulties in distinguishing between persistent rent incomes and other types of income. As a result, a high level of economic inequality will remain even with progressive income taxes.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic rents; Income Tax; Public Assistance; Simulation; Steady state
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E17 - Forecasting and Simulation: Models and Applications; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions; I - Health, Education, and Welfare > I3 - Welfare, Well-Being, and Poverty > I38 - Government Policy ; Provision and Effects of Welfare Programs

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