A General Theory of Inverse Welfare Functions

Katy Bergstrom () and William Dodds
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Katy Bergstrom: Tulane University

No 2408, Working Papers from Tulane University, Department of Economics

Abstract: This paper develops a general theory to recover the inverse welfare function that rationalizes a given tax schedule as optimal. Our theory allows for complex environments including the presence of multidimensional tax schedules, bunching/jumping behavior, optimization frictions, general equilibrium effects, and externalities. We show how inverse welfare functions can be used to assess the desirability of tax reforms and to test for Pareto efficiency. We numerically construct several inverse welfare functions for piecewise-linear income taxation, taxation with optimization frictions, joint income and property taxation, income taxation with labor demand and endogenous wages, and taxation with inequality aversion.

Keywords: inverse welfare function; inverse welfare weights; frictions; multidimensional taxation; general equilibrium; Pareto efficiency (search for similar items in EconPapers)
JEL-codes: D60 H21 H31 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-inv and nep-pbe
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http://repec.tulane.edu/RePEc/pdf/tul2408.pdf First Version, June 2024 (application/pdf)

Related works:
Working Paper: A General Theory of Inverse Welfare Functions (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:tul:wpaper:2408

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