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Accounting for family background when designing optimal income taxes: a microeconometric simulation analysis

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  • Rolf Aaberge
  • Ugo Colombino

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Abstract

The purpose of this paper is to introduce and adopt a generalised version of Roemer's (1998) Equality of Opportunity (EOp) framework, which we call extended EOp, for analysing second-best optimal income taxation. Unlike the pure EOp criterion of Roemer (1998) the extended EOp criterion allows for alternative weighting profiles in the treatment of income differentials between as well as within types when types are defined by circumstances that are beyond people's control. This study uses parental education as a measure of exogenous circumstances. An empirical microeconometric model of labour supply in Italy is employed to simulate and identify income tax-transfer rules that are optimal according to the extended EOp criterion. We look for second-best optimality, i.e. the tax-transfer rules are not allowed to depend on family background, they only depend on income: family background is taken indirectly into account. The rules are defined by a universal (not individualized) lump-sum transfer (positive or negative) and by one or two marginal tax rates. A rather striking result of the analysis is that the optimal tax-transfer rule turns out to be a universal lump-sum tax (with marginal tax rates equal to zero), under Roemer's pure EOp criterion as well as under the generalised EOp criterion with moderate degrees of aversion to within-type inequality. A higher degree of within-type inequality aversion instead produces EOp-optimal rules with positive marginal tax rates. When the EOp-version of the Gini welfare function is adopted, the optimal tax rule turns out to be close to the actual 1993 Italian tax system, if not for the important difference of prescribing a universal lump-sum positive transfer of 3,500,000 ITL (= 1807 Euros), which has no comparable counterpart in the actual system. On the other hand, when using the conventional equality of outcome (EO) criterion, the pure lump-sum tax always turns out to be optimal, at least with respect to the classes of two- and th

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Bibliographic Info

Article provided by Springer in its journal Journal of Population Economics.

Volume (Year): 25 (2012)
Issue (Month): 2 (January)
Pages: 741-761

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Handle: RePEc:spr:jopoec:v:25:y:2012:i:2:p:741-761

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Keywords: Equality of opportunity; Equality of outcome; Optimal income taxation; D63; H21; H31;

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  1. repec:ese:iserwp:2000-19 is not listed on IDEAS
  2. Mehran, Farhad, 1976. "Linear Measures of Income Inequality," Econometrica, Econometric Society, vol. 44(4), pages 805-09, July.
  3. Vito Peragine, 2004. "Measuring and implementing equality of opportunity for income," Social Choice and Welfare, Springer, vol. 22(1), pages 187-210, 02.
  4. Roemer, John E. & Aaberge, Rolf & Colombino, Ugo & Fritzell, Johan & Jenkins, Stephen P. & Lefranc, Arnaud & Marx, Ive & Page, Marianne & Pommer, Evert & Ruiz-Castillo, Javier & San Segundo, María Je, 2003. "To what extent do fiscal regimes equalize opportunities for income acquisition among citizens?," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/4749, Universidad Carlos III de Madrid.
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  7. Ebert, Udo, 1987. "Size and distribution of incomes as determinants of social welfare," Journal of Economic Theory, Elsevier, vol. 41(1), pages 23-33, February.
  8. Aaberge, Rolf & Colombino, Ugo & Strom, Steinar, 1999. "Labour Supply in Italy: An Empirical Analysis of Joint Household Decisions, with Taxes and Quantity Constraints," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(4), pages 403-22, July-Aug..
  9. Aaberge, Rolf & Colombino, Ugo, 2006. "Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply," IZA Discussion Papers 2468, Institute for the Study of Labor (IZA).
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  13. Hey, John D & Lambert, Peter J, 1980. "Relative Deprivation and the Gini Coefficient: Comment," The Quarterly Journal of Economics, MIT Press, vol. 95(3), pages 567-73, November.
  14. Rolf Aaberge, 2006. "Gini’s Nuclear Family," Discussion Papers 491, Research Department of Statistics Norway.
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  18. Christian Dustmann, 2004. "Parental background, secondary school track choice, and wages," Oxford Economic Papers, Oxford University Press, vol. 56(2), pages 209-230, April.
  19. Rolf Aaberge, 2000. "Characterizations of Lorenz curves and income distributions," Social Choice and Welfare, Springer, vol. 17(4), pages 639-653.
  20. Roemer, J.E., 1992. "A Pragmatic Theory of Responsibility for the Egalitarian Planner," Papers 391, California Davis - Institute of Governmental Affairs.
  21. Ugo Colombino & Steinar Strøm & Rolf Aaberge, 2000. "Labor supply responses and welfare effects from replacing current tax rules by a flat tax: Empirical evidence from Italy, Norway and Sweden," Journal of Population Economics, Springer, vol. 13(4), pages 595-621.
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  1. Mini-curso
    by Erik Figueiredo in Moral Hazard on 2011-03-03 21:25:00
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Cited by:
  1. Rolf Aaberge & Magne Mogstad & Vito Peragine, 2010. "Measuring long-term inequality of opportunity," Working Papers 158, ECINEQ, Society for the Study of Economic Inequality.
  2. Judith Niehues & Andreas Peichl, 2011. "Lower and upper bounds of unfair inequality: Theory and evidence for Germany and the US," Working Papers 216, ECINEQ, Society for the Study of Economic Inequality.
  3. Erik Figueiredo, 2011. "A Note on the Measurement of Unfair Inequality in Brazil," Economics Bulletin, AccessEcon, vol. 31(4), pages 2944-2951.
  4. Judith Niehues & Andreas Peichl, 2012. "Bounds of Unfair Inequality of Opportunity: Theory and Evidence for Germany and the US," CESifo Working Paper Series 3815, CESifo Group Munich.
  5. Colombino, Ugo, 2012. "Equilibrium Simulation with Microeconometric Models: A New Procedure with an Application to Income Support Policies," IZA Discussion Papers 6679, Institute for the Study of Labor (IZA).
  6. repec:ese:emodwp:em5-12 is not listed on IDEAS

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