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Choosing the tax rate in a linear income tax structure

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Author Info

  • John Creedy

    ()
    (University of Melbourne)

Abstract

This paper considers the choice of linear income tax rate in both majority voting and social welfare maximising contexts. Although the basic problem in each case - of finding the most preferred tax for the median voter and the welfare maximising tax for an independent judge or decision-maker - can be simply stated, it is usually not possible to obtain explicit solutions even for simple assumptions about preferences and population heterogeneity. The present paper instead gives special attention to a formulation of the required conditions in terms of easily interpreted magnitudes, the elasticity of average earnings with respect to the tax rate and a measure of inequality. The inequality measure takes the same basic form in each model, depending either on median earnings or a weighted average of earnings where the weights depend on value judgements regarding inequality aversion. The approach enables the comparative static effects of a range of parameter changes to be considered. The results are reinforced using numerical examples based on the constant elasticity of substitution utility function.

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Bibliographic Info

Article provided by Bankwest Curtin Economics Centre (BCEC), Curtin Business School in its journal Australian Journal of Labour Economics (AJLE).

Volume (Year): 11 (2008)
Issue (Month): 3 (September)
Pages: 257-276

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Handle: RePEc:ozl:journl:v:11:y:2008:i:3:p:257-276

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Web page: http://business.curtin.edu.au/research/publications/journals/ajle/
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Related research

Keywords: Taxation and Subsidies: Efficiency; Optimal Taxation Fiscal Policies and Behaviour of Economic Agents: General Personal Income and Other Non-business Taxes and Subsidies; includes inheritance and gift taxes;

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Cited by:
  1. Creedy, John, 2013. "The Elasticity of Taxable Income, Welfare Changes and Optimal Tax Rates," Working Paper Series 2875, Victoria University of Wellington, Chair in Public Finance.

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