Pro-rich Inflation and Optimal Income Taxation

We study the implications of an increase in price necessities, which disproportionally hurts poor, for optimal income taxation. When government is utilitarian and disutility from labor supply linear, nominal taxes transfers are unchanged as households more to secure their consumption expenditures. Quantitative analyses with convex reveal that, because positive effects, keeping average tax rates constant suffices optimally react asymmetric shock. The poorest agents most. Thus, policy response changes does not prevent disproportional decline indirect utility poorer households.