A General Theory of Inverse Welfare Functions

Katy Bergstrom () and William Dodds
Additional contact information
Katy Bergstrom: Tulane University

No 2308, Working Papers from Tulane University, Department of Economics

Abstract: Optimal taxation problems typically involve finding a tax schedule to maximize a welfare function. This paper considers the reverse problem of finding an inverse welfare function that rationalizes a given tax schedule as optimal. Inverse welfare functions encode the implicit interpersonal comparisons a society must make in order to justify a tax schedule. We develop a general theory to recover the inverse social welfare function not only for income tax schedules, but also for substantially more complex tax systems that incorporate many different forms of taxation and multidimensional agent heterogeneity. The key insight is that even in complex tax environments, the (Gateaux) derivative of government revenue with respect to the tax schedule is the key empirical object required to construct the inverse welfare function. Additionally, our framework allows us to characterize Pareto efficient schedules in complex environments and extend the Atkinson-Stiglitz result. Our framework can also be augmented to construct inverse welfare functions when there are general equilibrium effects of taxation and when agents make optimization errors. We provide a number of example inverse welfare function constructions related to the taxation of couples, income taxation with labor demand and endogenous wages, piecewise linear income taxation, and joint taxation of income and housing rent.

Keywords: inverse optimal; inverse welfare; multidimensional taxation; multidimensional heterogeneity (search for similar items in EconPapers)
JEL-codes: D82 D86 H21 (search for similar items in EconPapers)
Date: 2023-12
New Economics Papers: this item is included in nep-acc, nep-iue, nep-nud, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://repec.tulane.edu/RePEc/pdf/tul2308.pdf First Version, December 2023 (application/pdf)

Related works:
Working Paper: A General Theory of Inverse Welfare Functions (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tul:wpaper:2308

Access Statistics for this paper

More papers in Working Papers from Tulane University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Kerui Geng ().