Preference responsibility versus poverty reduction in the taxation of labor incomes

Lancelot Henry de Frahan and Francois Maniquet

Journal of Public Economics, 2021, vol. 197, issue C

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.

Keywords: optimal taxation; responsibility; poverty reduction (search for similar items in EconPapers)
JEL-codes: D63 H21 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:197:y:2021:i:c:s0047272721000220

DOI: 10.1016/j.jpubeco.2021.104386

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