Optimal Taxation According to Equality of Opportunity: A Microeconometric Simulation Analysis
AbstractThe purpose of this paper is to introduce and adopt a generalised version of Roemer's (1998) Equality of Opportunity (EOp) framework, which we call extended EOp, for analysing second-best optimal income taxation. Unlike the pure EOp criterion of Roemer (1998) the extended EOp criterion allows for alternative weighting profiles in the treatment of income differentials between and within types when types are defined by (observable) circumstances that are beyond people's control. An empirical microeconometric model of labour supply in Italy is used to simulate and identify income tax-transfer rules that are optimal according to the extended EOp criterion. The tax-transfer rules are only allowed to depend on income, i.e. we look for second-best optimality. The rules are defined by a universal lump-sum transfer (positive or negative) and by one or two marginal tax rates. A rather striking result of the analysis is that the optimal tax-transfer rule turns out to be a universal lump-sum tax (with marginal tax rates equal to zero), under Roemer's pure EOp criterion as well as under the generalised EOp criterion with moderate degrees of aversion to within-type inequality. A high degree of withintype inequality aversion instead produces EOp-optimal rules with positive marginal tax rates. When the EOp-version of the Gini welfare function is adopted, the optimal tax rule turns out to be close to the actual 1993 Italian tax system, if not for the important difference of prescribing a universal lumpsum positive transfer of 3,500,000 ITL, which has no comparable counterpart in the actual system. On the other hand, when using the conventional equality of outcome (EO) criterion, the pure lump-sum tax always turns out to be optimal, at least with respect to the classes of two- and three-parameter rules. We also compute optimal rules under the additional constraint that universal lump-sum taxes are not feasible. Overall, the results suggest, somehow surprisingly, that the extended EOp approach would demand more redistribution than the EO approach.
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Bibliographic InfoPaper provided by CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY in its series CHILD Working Papers with number wp05_08.
Length: 30 pages
Date of creation: Apr 2008
Date of revision:
Equality of opportunity; equality of outcome; labour supply; optimal income taxation;
Other versions of this item:
- Rolf Aaberge & Ugo Colombino & John E. Roemer, 2003. "Optimal Taxation According to Equality of Opportunity: a Microeconometric Simulation Analysis," ICER Working Papers 05-2003, ICER - International Centre for Economic Research.
- D19 - Microeconomics - - Household Behavior - - - Other
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-05 (All new papers)
- NEP-PBE-2008-05-05 (Public Economics)
- NEP-PUB-2008-05-05 (Public Finance)
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