Choosing the tax rate in a linear income tax structure

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Choosing the tax rate in a linear income tax structure

Author Info

John Creedy () (University of Melbourne)

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John Creedy

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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Publisher Info
Article provided by The Centre for Labour Market Research (CLMR), 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://www.business.curtin.edu.au/business/research/journals-published-by-cbs/australian-journal-of-labour-economics

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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