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Are Two Tax Rates Better Than One?

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  • Felix R. FitzRoy
  • Jim Y. Jin
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    Abstract

    Should two–band income taxes be progressive given a general income distribution? We provide a negative answer under utilitarian and max-min welfare functions. While this result clarifies some ambiguities in the literature, it does not rule out progressive taxes in general. If we maximize total or weighted utility of the poor, as often intended by the society, progressive taxes can be justified, especially when the ‘rich’ are very rich. Under these objectives we obtain new necessary conditions for progressive taxes, which only depend on aggregate features of income distributions. The validity of these conditions is examined using plausible income distributions.

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    Bibliographic Info

    Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0905.

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    Date of creation: May 2009
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    Handle: RePEc:san:crieff:0905

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    Keywords: optimal taxation; progressive tax; utilitarian; max-min; help the poor.;

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