Working Paper
How should an optimal tax system react to a crisis?

Simulation results for Zambia

The COVID-19 pandemic increased public debt and changed the income distribution in many countries. We use a numerical simulation approach to derive optimal nonlinear marginal tax rates for the pre-crisis and crisis periods. 

We contribute to the literature by examining optimal tax rates numerically for a developing country and by investigating how the tax rates should be changed as a response to a crisis. 

Our results indicate that the actual extent of redistribution, especially via direct transfers to low-income individuals, should be considerably higher than what the present system offers. Because the crisis increased pre-tax inequality, the tax system should become more redistributive as a response to a crisis. 

We also demonstrate how a combination of a higher revenue requirement before the crisis and a lower revenue requirement after the crisis increases social welfare.