Inequality Aversion, Externalities, and Pareto-Efficient Income Taxation (original) (raw)

Inequality Aversion and Marginal Income Taxation

2016

This paper deals with tax policy responses to inequality aversion by examining the first-best Pareto-efficient marginal tax structure when people are inequality averse. In doing so, we distinguish between four different and widely used models of inequality aversion. The results show that empirically and experimentally quantified degrees of inequality aversion have potentially very strong implications for Pareto-efficient marginal income taxation. It also turns out that the exact type of inequality aversion (self-centered vs. non-self-centered), and the measures of inequality used, matter a great deal. For example, based on simulation results mimicking the disposable income distribution in the US in 2013, the preferences suggested by Fehr and Schmidt (1999) imply monotonically increasing marginal income taxes, with large negative marginal tax rates for low-income individuals and large positive marginal tax rates for high-income individuals. In contrast, the often considered similar m...

Income inequality, redistributive preferences and the extent of redistribution: An empirical application of optimal tax approach

2018

We examine empirically the relationship between the extent of redistribution and the components of the Mirrlees framework, with a focus on inherent inequality and government’s redistributive preferences. We have constructed our income distribution variables from the Luxembourg Income Study (LIS) database, which provides information on both factor and disposable incomes. Our redistributive preference measure is constructed using the optimal tax formula for which we have collected data from various sources. In addition to traditional linear specifications, we use flexible methods to allow nonlinearities because pre-specified functional forms are not easy to justify in empirical investigations of the optimal tax framework. We study 14 advanced countries for approximately four decades and find support for the Mirrlees model: There is a positive relationship between factor-income inequality and the extent of redistribution. We also find a link between our redistributive-preference measur...

Inequality and the Choice of the Personal Tax Base

Research on Economic Inequality, 2007

It is possible to employ either income or expenditure as the base for personal taxation. A considerable literature has developed that investigates the relative efficiency of these bases. The answer is usually in favor of the expenditure tax since it encourages capital accumulation through the avoidance of the double taxation of saving. In contrast, the literature is almost silent on the relative equity of the two bases. We investigate the redistributive consequences of the choice in models with two sources of heterogeneity: skill in employment and lump-sum endowment. The Gini coefficient is used to measure the degreee of equity achieved by the tax bases in static and dynamic settings. Income taxes and expenditure taxes that generate equal welfare (or equal revenue) are compared. In the static economy the income tax leads to lower inequality except when skill and endowment are negatively correlated. Inequality is always lower with the income tax in the dynamic economy. These results support the choice of income as the base for personal taxation if reduction in inequality is a priority of policy.

Income Inequality and Taxation

Mathematics Magazine, 2021

Summary–Income inequality measurement via the Gini index is reviewed, both pre-tax and post-tax for a general tax curve. Focus then shifts to the linear income tax with a single marginal tax rate and a common subsidy for all taxpayers. It is demonstrated that significant inequality reduction is possible with this simple tax structure. Finally, we benchmark against real incomes data from the U.S. Census Bureau and the U.S. Internal Revenue Service.

More Income Equality or Not? An Empirical Analysis of Individuals' Preferences for Redistribution

2008

Do people prefer a society with an extensive social welfare system with high taxes, or low taxes but lax redistributive policies? Although economists have for a long time investigated the trade-off mechanism between equity and efficiency, surprisingly little information is available about citizens' preferences over the distribution of income in a society. The aim of this paper is reduce this shortcoming, investigating in an empirical study working with World Values Survey, what shapes individuals' preferences for income equality in Spain. We present evidence that not only traditional economic variables are relevant to be considered, but also factors such as ideology, political interest, fairness perception about others or trust in institutions, are key determinants to understand preferences towards redistribution and equality. Furthermore, we also find that regional conditions affect the citizens' preferences for income equality. Higher income inequality leads to stronger preferences for equality. On the other hand, there is the tendency that higher social expenditures reduce the preferences for income equality.

The Pareto-Frontier in a Simple Mirrleesian Model of Income Taxation

SSRN Electronic Journal, 2000

We characterize the Pareto-frontier in a simple Mirrleesian model of income taxation. We show how the second-best frontier which incorporates incentive constraints due to private information on productive abilities relates to the first-best frontier which takes only resource constraints into account. In particular, we argue that the second-best frontier can be interpreted as a Laffer-curve. We also use this second-best frontier for a comparative statics analysis of how optimal income tax rates vary with the degree of inequity aversion, and for a characterization of optimal public-good provision. We show that a more inequity averse policy maker chooses tax schedules that are more redistributive and involve higher marginal tax rates, but chooses a lower public-goods provision level.

Income inequality and the tax structure: Evidence from developed and developing countries

Journal of Comparative Economics, 2015

This paper seeks to examine the effect of income inequality on the structure of tax policies. We first use a simplified theoretical framework which allows us to formalize the testable implications of the relevant literature. Subsequently, our analysis indicates that more unequal economies rely heavier on capital relative to labor income taxation. This relationship remains robust across various alternative measures of income inequality and most importantly through alternative political regimes. In addition, our analysis investigates the role of the tax structure on the relationship between income inequality and economic growth. Our empirical findings provide evidence in favor of a political economy channel through which income inequality affects economic growth. JEL: H10, H23, H26 2 that allows us to formalize the testable implications of the relevant theoretical literature.

Inequality and the composition of taxes

International Tax and Public Finance

This paper analyzes the political economics of the composition of taxes. Taxes may be levied on income, or on expenditure, and the median voter is pivotal in the theoretical framework analyzed. As in Meltzer and Richard (1981) income taxes increase with inequality. Conversely expenditure taxes …rst increase and then decrease with increasing inequality. The extent to which taxes are levied on income relative to expenditure unambiguously rises with inequality. Crosscountry data exhibit a robust positive correlation between the extent to which taxes are levied on income relative to expenditure, and inequality. Consistent with the theory this relationship holds most signi…cantly in stronger democracies.