Choosing the tax rate in a linear income tax structure
AbstractThis 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 InfoArticle 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)
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Web page: http://business.curtin.edu.au/research/publications/journals/ajle/
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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;
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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- 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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