A Quantitative Analysis of Optimal Income Redistribution in Anglo-Saxon and Continental Economies

<jats:p>We develop a medium-scale overlapping-generations model with endogenous labour supply and skill premium to study optimal income redistribution using progressive labour income taxes and pensions. The model is calibrated to the four countries USA, Great Britain, Italy and Germany which differ substantially in their tax and pension systems, demographics, and skill shares among workers. Optimal pension benefits are proportional to lifetime contributions in all four countries, while the optimal degree of income progressivity varies systematically with country characteristics such as the size of the social security system, demographics or the skill share in the labour force. Optimal income taxes should be more progressive in the United States and Great Britain and much less progressive in the continental countries, Italy and Germany. Population ageing further reduces the optimal extent of income redistribution.</jats:p>