Preference responsibility versus poverty reduction in the taxation of labor incomes

Lancelot Henry  de Frahan; François Maniquet

doi:10.1016/j.jpubeco.2021.104386

Preference responsibility versus poverty reduction in the taxation of labor incomes

Lancelot Henry de Frahan, François Maniquet

Living Conditions

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Abstract

We study the tax schemes that maximize social welfare functions built on axioms of responsibility for one's preferences (the requirement that the social welfare function should treat identically agents with the same wage, independently of their preferences) and poverty reduction. We find zero and negative marginal tax rates on low incomes at the optimum and bunching at the income level of the most hardworking minimum wage households. When preferences are iso-elastic, we derive the optimal tax formula, which we calibrate to the US economy. Our formula approximates the shape of the current US tax function for households with at least one child. This result suggests that a fairness-based approach, and these axioms in particular, can help close the gap between the recommendations of optimal tax theory and actual policies.

Original language	English
Article number	104386
Journal	Journal of Public Economics
Volume	197
DOIs	https://doi.org/10.1016/j.jpubeco.2021.104386
Publication status	Published - May 2021

Bibliographical note

Funding Information:
We thank two anonymous referees, the editor, Marianne Bertrand, St?phane Bonhomme, Richard Blundell, Nathaniel Hendren, Hilary Hoynes, Guy Laroque, Casey Mulligan, Doron Ravid, Raaj Sah, Johannes Spinnewyn, Matthew Weinzierl, Glen Weyl and John Weymark as well as seminar participants at the LSE, IFS, LISER, the Universities of Chicago, Cologne, Manchester, Oslo, the Delhi School of Economics and conference attendees at the 2016 and 2018 Social Choice and Welfare meetings at Lund and Seoul, 2017 RIDGE conference in public finance, Montevideo, for their comments. Fran?ois Maniquet's work was supported by the European Research Council under the European Union's Seventh Framework Programme (FP7/2007-2013)/ ERC n? 269831. This research advanced while Maniquet was visiting the department of economics of University College London. Generous support from the Leverhulme Foundation is gratefully acknowledged.

Keywords

optimal taxation
poverty reduction
responsibility

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10.1016/j.jpubeco.2021.104386

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title = "Preference responsibility versus poverty reduction in the taxation of labor incomes",

abstract = "We study the tax schemes that maximize social welfare functions built on axioms of responsibility for one's preferences (the requirement that the social welfare function should treat identically agents with the same wage, independently of their preferences) and poverty reduction. We find zero and negative marginal tax rates on low incomes at the optimum and bunching at the income level of the most hardworking minimum wage households. When preferences are iso-elastic, we derive the optimal tax formula, which we calibrate to the US economy. Our formula approximates the shape of the current US tax function for households with at least one child. This result suggests that a fairness-based approach, and these axioms in particular, can help close the gap between the recommendations of optimal tax theory and actual policies.",

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note = "Funding Information: We thank two anonymous referees, the editor, Marianne Bertrand, St?phane Bonhomme, Richard Blundell, Nathaniel Hendren, Hilary Hoynes, Guy Laroque, Casey Mulligan, Doron Ravid, Raaj Sah, Johannes Spinnewyn, Matthew Weinzierl, Glen Weyl and John Weymark as well as seminar participants at the LSE, IFS, LISER, the Universities of Chicago, Cologne, Manchester, Oslo, the Delhi School of Economics and conference attendees at the 2016 and 2018 Social Choice and Welfare meetings at Lund and Seoul, 2017 RIDGE conference in public finance, Montevideo, for their comments. Fran?ois Maniquet's work was supported by the European Research Council under the European Union's Seventh Framework Programme (FP7/2007-2013)/ ERC n? 269831. This research advanced while Maniquet was visiting the department of economics of University College London. Generous support from the Leverhulme Foundation is gratefully acknowledged. ",

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AU - Maniquet, François

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N2 - We study the tax schemes that maximize social welfare functions built on axioms of responsibility for one's preferences (the requirement that the social welfare function should treat identically agents with the same wage, independently of their preferences) and poverty reduction. We find zero and negative marginal tax rates on low incomes at the optimum and bunching at the income level of the most hardworking minimum wage households. When preferences are iso-elastic, we derive the optimal tax formula, which we calibrate to the US economy. Our formula approximates the shape of the current US tax function for households with at least one child. This result suggests that a fairness-based approach, and these axioms in particular, can help close the gap between the recommendations of optimal tax theory and actual policies.

AB - We study the tax schemes that maximize social welfare functions built on axioms of responsibility for one's preferences (the requirement that the social welfare function should treat identically agents with the same wage, independently of their preferences) and poverty reduction. We find zero and negative marginal tax rates on low incomes at the optimum and bunching at the income level of the most hardworking minimum wage households. When preferences are iso-elastic, we derive the optimal tax formula, which we calibrate to the US economy. Our formula approximates the shape of the current US tax function for households with at least one child. This result suggests that a fairness-based approach, and these axioms in particular, can help close the gap between the recommendations of optimal tax theory and actual policies.

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Preference responsibility versus poverty reduction in the taxation of labor incomes

Abstract

Bibliographical note

Keywords

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