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Pareto-Improving Tax Reforms and the Earned Income Tax Credit

Author

Listed:
  • Felix Bierbrauer
  • Pierre C. Boyer
  • Emanuel Hansen

Abstract

This paper provides necessary and sufficient conditions for the existence of Pareto-improving tax reforms. The conditions can be expressed as sufficient statistics and have a wide range of potential applications in public finance. We discuss one such application in detail: the introduction of the Earned Income Tax Credit (EITC) in the US. We find that the EITC can be viewed as a response to an inefficiency in the tax and transfer system prevailing at the time. This adds a new perspective to the literature on why the EITC is a good idea, emphasizing Pareto improvements rather than equity-efficiency trade-offs.

Suggested Citation

  • Felix Bierbrauer & Pierre C. Boyer & Emanuel Hansen, 2020. "Pareto-Improving Tax Reforms and the Earned Income Tax Credit," CESifo Working Paper Series 8358, CESifo.
  • Handle: RePEc:ces:ceswps:_8358
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    References listed on IDEAS

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    1. Bruce D. Meyer & Dan T. Rosenbaum, 2001. "Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 1063-1114.
    2. Pierre C. Boyer & Felix J. Bierbrauer, 2014. "The Pareto-Frontier in a Simple Mirrleesian Model of Income Taxation," Annals of Economics and Statistics, GENES, issue 113-114, pages 185-206.
    3. Bargain, Olivier & Dolls, Mathias & Neumann, Dirk & Peichl, Andreas & Siegloch, Sebastian, 2011. "Tax-benefit systems in Europe and the US: between equity and efficiency," EUROMOD Working Papers EM2/11, EUROMOD at the Institute for Social and Economic Research.
    4. Henrik Jacobsen Kleven, 2014. "How Can Scandinavians Tax So Much?," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 77-98, Fall.
    5. Jacob Bastian, 2020. "The Rise of Working Mothers and the 1975 Earned Income Tax Credit," American Economic Journal: Economic Policy, American Economic Association, vol. 12(3), pages 44-75, August.
    6. Raj Chetty, 2009. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 451-488, May.
    7. repec:adr:anecst:y:2014:i:113-114:p:9 is not listed on IDEAS
    8. Mikhail Golosov & Aleh Tsyvinski & Nicolas Werquin, 2014. "A Variational Approach to the Analysis of Tax Systems," NBER Working Papers 20780, National Bureau of Economic Research, Inc.
    9. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
    10. Brett, Craig & Weymark, John A., 2017. "Voting over selfishly optimal nonlinear income tax schedules," Games and Economic Behavior, Elsevier, vol. 101(C), pages 172-188.
    11. Florian Scheuer, 2014. "Entrepreneurial Taxation with Endogenous Entry," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 126-163, May.
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    Cited by:

    1. Kevin Spiritus & Etienne Lehmann & Sander Renes, "undated". "Optimal Taxation with Multiple Incomes and Types," Tinbergen Institute Discussion Papers 22-000/IVI, Tinbergen Institute.
    2. Hansen, Emanuel, 2021. "Optimal income taxation with labor supply responses at two margins: When is an Earned Income Tax Credit optimal?," Journal of Public Economics, Elsevier, vol. 195(C).
    3. Glogowsky, Ulrich, 2021. "Behavioral responses to inheritance and gift taxation: Evidence from Germany," Journal of Public Economics, Elsevier, vol. 193(C).

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    More about this item

    Keywords

    tax reforms; non-linear income taxation; optimal taxation; earned income tax credits; pareto efficiency;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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