A Welfare Analysis of Progressive Tax and Transfer Policies: Is the Present System Better than the Flat Tax System?

This paper is my ongoing research on welfare analysis using real business cycle approach. In this paper, I have modeled heterogeneous households with different income potential and paying different tax rates. The model incorporates progressive tax rates and computes its effects on the welfare of the households. By altering the rate of tax progression, it is possible to see and compare the effects of various tax structures on the welfare of the economy. My preliminary comparison of progressive tax rates with proportional tax rates shows that the proportional tax rates cause a greater welfare loss than the progressive tax rates.