Income Taxation with Labor Responses

Udo Ebert and Patrick Moyes

Journal of Public Economic Theory, 2007, vol. 9, issue 4, pages 653-682

Abstract: When incomes are exogenously given, U. Jakobsson ( Journal of Public Economics s 5 (1976), 161-168) proved that a progressive tax structure always reduces inequality. We investigate the implications for effective progression of relaxing the assumption of exogenous incomes when individuals have the same preferences but different talents. We extend the standard result and conclude that it is generally impossible to disentangle the respective contributions to inequality reduction of the tax schedule and agents' preferences. For a linear tax schedule to result in less unequally distributed incomes it is sufficient that the elasticity of labor supply be nonincreasing in exogenous income and nondecreasing in productivities. The latter condition proves to be necessary and sufficient when the tax schedule is proportional. Copyright 2007 Blackwell Publishing, Inc..

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