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Accounting for family background when designing optimal income taxes: a microeconometric simulation analysis

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  • Rolf Aaberge
  • Ugo Colombino

Abstract

The 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 as well as within types when types are defined by circumstances that are beyond people's control. This study uses parental education as a measure of exogenous circumstances. An empirical microeconometric model of labour supply in Italy is employed to simulate and identify income tax-transfer rules that are optimal according to the extended EOp criterion. We look for second-best optimality, i.e. the tax-transfer rules are not allowed to depend on family background, they only depend on income: family background is taken indirectly into account. The rules are defined by a universal (not individualized) 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 higher degree of within-type 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 lump-sum positive transfer of 3,500,000 ITL (=1807 Euros), 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 thr
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  • Rolf Aaberge & Ugo Colombino, 2012. "Accounting for family background when designing optimal income taxes: a microeconometric simulation analysis," Journal of Population Economics, Springer;European Society for Population Economics, vol. 25(2), pages 741-761, January.
  • Handle: RePEc:spr:jopoec:v:25:y:2012:i:2:p:741-761
    DOI: 10.1007/s00148-010-0331-y
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      by Erik Figueiredo in Moral Hazard on 2011-03-04 03:25:00

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    Cited by:

    1. Judith Niehues & Andreas Peichl, 2014. "Upper bounds of inequality of opportunity: theory and evidence for Germany and the US," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 43(1), pages 73-99, June.
    2. Judith Niehues & Andreas Peichl, 2011. "Lower and Upper Bounds of Unfair Inequality: Theory and Evidence for Germany and the US," SOEPpapers on Multidisciplinary Panel Data Research 395, DIW Berlin, The German Socio-Economic Panel (SOEP).
    3. Paolo Brunori & Flaviana Palmisano & Vito Peragine, 2014. "Income taxation and equity: New dominance criteria and an application to Romania," Working Papers 348, ECINEQ, Society for the Study of Economic Inequality.
    4. Olivier Bargain & Andreas Peichl, 2016. "Own-wage labor supply elasticities: variation across time and estimation methods," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-31, December.
    5. Rolf Aaberge & Ugo Colombino, 2014. "Labour Supply Models," Contributions to Economic Analysis, in: Cathal O’Donoghue (ed.), Handbook of Microsimulation Modelling, volume 127, pages 167-221, Emerald Publishing Ltd.
    6. Erwin Ooghe & Andreas Peichl, 2015. "Fair and Efficient Taxation under Partial Control," Economic Journal, Royal Economic Society, vol. 125(589), pages 2024-2051, December.
    7. Colombino, Ugo & Islam, Nizamul, 2020. "Combining microsimulation and optimization to identify optimal flexible tax-transfer rules," EUROMOD Working Papers EM13/20, EUROMOD at the Institute for Social and Economic Research.
    8. Erik Figueiredo, 2011. "A Note on the Measurement of Unfair Inequality in Brazil," Economics Bulletin, AccessEcon, vol. 31(4), pages 2944-2951.
    9. Ugo Colombino & Nizamul Islam, 2021. "Global and digitalised economy, new labour demand scenarios and optimal tax-transfer reforms," CHILD Working Papers Series 90 JEL Classification: H2, Centre for Household, Income, Labour and Demographic Economics (CHILD) - CCA.
    10. Ugo Colombino & Nizamul Islam, 2021. "Combining microsimulation and optimization to identify optimal universalistic tax-transfer rule," LISER Working Paper Series 2021-06, LISER.
    11. Judith Niehues & Andreas Peichl, 2012. "Bounds of Unfair Inequality of Opportunity: Theory and Evidence for Germany and the US," CESifo Working Paper Series 3815, CESifo.
    12. Islam, Nizamul & Colombino, Ugo, 2018. "The case for NIT+FT in Europe. An empirical optimal taxation exercise," Economic Modelling, Elsevier, vol. 75(C), pages 38-69.
    13. Colombino Ugo, 2012. "A microeconometric-computational approach to empirical optimal taxation: outline of a project," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201218, University of Turin.
    14. Flaviana Palmisano, 2011. "Mobility and Long term Equality of Opportunity," SERIES 0035, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Feb 2011.
    15. Aaberge, Rolf & Mogstad, Magne & Peragine, Vito, 2011. "Measuring long-term inequality of opportunity," Journal of Public Economics, Elsevier, vol. 95(3-4), pages 193-204, April.
    16. Erik Figueiredo & José Silva Netto Junior, 2014. "More equal but not so fair: an analysis of Brazilian income distribution from 1995 to 2009," Empirical Economics, Springer, vol. 46(4), pages 1325-1337, June.
    17. Bargain, Olivier & Peichl, Andreas, 2013. "Steady-state labor supply elasticities: A survey," ZEW Discussion Papers 13-084, ZEW - Leibniz Centre for European Economic Research.
    18. Colombino Ugo, 2010. "Equilibrium policy simulations with random utility models of labour supply," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201015, University of Turin.
    19. Ugo Colombino, 2015. "Five Crossroads on the Way to Basic Income. An Italian Tour," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 1(3), pages 353-389, November.
    20. Colombino Ugo, 2012. "Equilibrium simulation with microeconometric models. A new procedure with an application to income support policies," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201209, University of Turin.
    21. Andrén, Daniela & Andrén, Thomas, 2014. "Women's and men's responses to in-work benefits: The influence of younger children," Working Papers 2014:1, Örebro University, School of Business.
    22. Nizamul Islam & Ugo Colombino, 2018. "The case for negative income tax with flat tax in Europe. An empirical optimal taxation exercise," Working Papers 454, ECINEQ, Society for the Study of Economic Inequality.
    23. Niehues, J. (Judith) & Andreas Peichl, 2012. "GINI DP 34: Bounds of Unfair Inequality of Opportunity: Theory and Evidence for Germany and the US," GINI Discussion Papers 34, AIAS, Amsterdam Institute for Advanced Labour Studies.

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    More about this item

    Keywords

    Equality of opportunity; Equality of outcome; Optimal income taxation; D63; H21; H31;
    All these keywords.

    JEL classification:

    • 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

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