Pareto-Improving Tax Reforms and the Earned Income Tax Credit

Felix Bierbrauer, Pierre Boyer and Emanuel Hansen

No 8358, CESifo Working Paper Series from CESifo

Abstract: We develop a new approach for the identification of Pareto-improving tax reforms. This approach yields necessary and sufficient conditions for the existence of Pareto-improving reform directions. A main insight is that “Two brackets are enough”: When the system cannot be improved by altering tax rates in one or two income brackets, then there is no continuous reform direction that is Pareto-improving. We also show how to check whether a given tax reform is Pareto-improving. We use these tools to study the introduction of the Earned Income Tax Credit (EITC) in the US in 1975. A robust finding is that, prior to the EITC, the US tax-transfer system was not Pareto-efficient. Under plausible assumptions about behavioral responses, the 1975 reform was not Pareto-improving. Qualitatively, though, it had the right properties: A similar reform with earnings subsidies made available to a broader range of incomes would have been Pareto-improving.

Keywords: tax reforms; non-linear income taxation; optimal taxation; earned income tax credits; Pareto efficiency (search for similar items in EconPapers)
JEL-codes: C72 D72 D82 H21 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Pareto‐Improving Tax Reforms and the Earned Income Tax Credit (2023)
Working Paper: Pareto-improving tax reforms and the Earned Income Tax Credit (2020)
Working Paper: Pareto-improving tax reforms and the Earned Income Tax Credit (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8358

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