This paper examines two tax regimes in a world where abilities to earn differ. It compares the distributions of utilities under a “flat” tax regime where all income is subject to a common tax rate, and proceeds finance a common transfer paid to all, with one with a menu of tax rates and transfers from which each can select the combination that suits him or her best. When the two regimes are optimized under a social welfare function that weights minimum utilities enough, or reflects a large enough requirement for government spending, it turns out that everyone is better off in the second regime than the first.
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Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number
07-10.