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Sacrifice and Efficiency of the Income Tax Schedule

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  • Costa, Carlos E. da
  • N. Pereira, Thiago
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    Abstract

    We investigate the efficiency of equal sacrifice tax schedules in an economywhich primitives are exactly those in Mirrlees (1971): a continuum of individualswith identical preferences defined over consumption and leisure who differ withrespect to their labor market productivity. Using a separable specification forpreferences we derive the minimum equal sacrifice allocation and recover thetax schedule that implements it. The separable specification allows us to usethe methodology developed by Werning (2007b) to check whether the scheduleis efficient, that is, whether there is no alternative tax schedule that raises morerevenue while delivering less utility to no one. We find that inefficiency does notarise for most parametrizations we use to approximate the US economy. For thefew cases for which inefficiency does arise, it does so only for very high levels ofincome and marginal tax rates.

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    Bibliographic Info

    Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 725.

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    Date of creation: 01 Dec 2011
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    Handle: RePEc:fgv:epgewp:725

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    1. Berliant, M. & Gouveia, M., 1990. "Equal Sacrifice And Incentive Compatible Income Taxation," RCER Working Papers 219, University of Rochester - Center for Economic Research (RCER).
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