o:29431 Social Welfare Effects of Progressive Income Taxation under Increasing Inequality en Abstract: During the 2008 economic crisis, labour market inactivity, unemployment and work informality in Serbia rose substantially, triggering a salient increase in Gini-measured inequality (by 4.3 pp), while income tax progressivity remained very low. Using the microsimulation and utility function estimation techniques on 2007 and 2012 household survey data for Serbia, we compare the social welfare effects of a hypothetical shift from flat to progressive taxation, before and after the crisis. We find that a shift from flat to progressive tax and the consequent behavioural response lead to a reduction in inequality, a rise in total labour supply and an increase in the overall social welfare in both years. Although the decrease in inequality is higher in 2012, the overall welfare effects are slightly larger in 2007, due to the stronger labour supply response and the stronger disutility of work found in the latter year. This may suggest that a rise in inequality does not per se create a stronger case for progressive taxation, as the welfare effects are considerably driven by the structure of income-leisure preferences. Keywords: Optimal income taxation, tax progressivity, inequality, labour supply, social welfare 1552099 10.18267/j.pep.750 1552101 1210-0455 2023-05-15T09:36:50.894Z 44 no 46 Saša Ranđelović Univerzitet u Beogradu Ekonomski fakultet 13835367 0000-0001-8445-9756 Marko Vladisavljević Institut ekonomskih nauka person 10718311 0000-0001-6020-1355 application/pdf 338818 https://phaidrabg.bg.ac.rs/o:29431 no yes 18 70 92000001 11A03 Prague economic papers 29 5 575 599 2020