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Optimal Utilitarian Taxation and Horizontal Equity

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  • Henrik Jordahl
  • Luca Micheletto

Abstract

We impose a horizontal equity restriction on the problem of finding the optimal utilitarian tax mix. The horizontal equity constraint requires that individuals with the same ability have to pay the same amount of taxes regardless of their preferences for leisure. Contrary to normal findings, we find that a good that is complementary to leisure can be encouraged by the tax system, and that a good that normally should be discouraged by the tax system can be subsidized even if the economy is composed of only two private commodities plus leisure. Also, the marginal effective tax rate can be different from zero at the top (of the ability distribution) when the tax mix obeys the horizontal equity constraint.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 977.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_977

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Keywords: horizontal equity; optimal taxation; heterogeneous preferences; utilitarianism;

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Citations

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Cited by:
  1. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2010. "Public Provision of Private Goods, Tagging and Optimal Income Taxation withHeterogeneity in Needs," CESifo Working Paper Series 3275, CESifo Group Munich.
  2. Jukka Pirttilä & Sanna Tenhunen, 2008. "Pawns and queens revisited: public provision of private goods when individuals make mistakes," International Tax and Public Finance, Springer, vol. 15(5), pages 599-619, October.
  3. Jordahl, Henrik & Luca Micheletto, 2002. "Optimal Utilitarian Taxation and Horizontal Equity," Royal Economic Society Annual Conference 2002 107, Royal Economic Society.
  4. Alessandro Balestrino, 2012. "Family Taxation, Fertility, and Horizontal Equity: A Political Economy Perspective," CESifo Working Paper Series 3774, CESifo Group Munich.
  5. Hodler, Roland, 2008. "Leisure and redistribution," European Journal of Political Economy, Elsevier, vol. 24(2), pages 354-363, June.

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