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A Loglinear Tax and Transfer Function:

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  • John Creedy and Solmaz Moslehi

Abstract

This paper explores the use of a loglinear tax and transfer function, displaying increasing marginal and average tax rates along with a means-tested transfer payment. The two parameters are a breakeven income threshold, where the average tax rate is zero, and a tax parameter equivalent to the marginal tax rate at the break-even income level. When combined with Cobb-Douglas utility, the resulting labour supply is fixed and independent of the individual’s wage rate. For an additive social welfare function involving the sum of logarithms of (indirect) utilities, a convenient expression is available for the optimal tax rate in a framework in which individuals differ only in the wage rate they face. It is shown that a unique optimal rate exists,depending on the preference for consumption and the inequality of wage rates. This coincides with the majority voting equilibrium rate. As with the linear tax function, higher inequality is associated with choice of a higher tax rate.

Suggested Citation

  • John Creedy and Solmaz Moslehi, 2010. "A Loglinear Tax and Transfer Function:," Department of Economics - Working Papers Series 1112, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:1112
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    References listed on IDEAS

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    1. Waterson, Michael, 1985. "On Progressive Taxation and Risk-taking," Oxford Economic Papers, Oxford University Press, vol. 37(3), pages 510-519, September.
    2. Creedy, John & McDonald, Ian M, 1992. "Income Tax Changes and Trade Union Wage Demands," Australian Economic Papers, Wiley Blackwell, vol. 31(58), pages 47-57, June.
    3. Hersoug, Tor, 1984. "Union Wage Responses to Tax Changes," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 37-51, March.
    4. John Creedy & Norman Gemmell, 2006. "Modelling Tax Revenue Growth," Books, Edward Elgar Publishing, number 4073.
    5. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
    6. Creedy, John, 1979. "Income averaging and progressive taxation," Journal of Public Economics, Elsevier, vol. 12(3), pages 387-397, December.
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