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A comparison of optimal tax policies when compensation or responsibility matter

  • JACQUET, Laurent

    ()

    (Norwegian School of Economics and Business Administration, Economics Department, Bergen, Norway)

  • VAN DE GAER, Dirk

    ()

    (SHERPPA, Faculteit Economie and Bedrijfskunde, Ghent University, Ghent, Belgium and Université catholique de Louvain, CORE, Louvain la Neuve, Belgium)

This paper examines optimal redistribution in a model with high and low-skilled individuals with heterogeneous tastes for labor, that either work or not. With such double heterogeneity, traditional Welfarist criteria including Utilitarianism fail to take the compensation-responsibility trade-off into account. As a response, several other criteria have been proposed in the literature. This paper is the first to compare the extent to which optimal policies based on different normative criteria obey the principles of compensation (for differential skills) and responsibility (for preferences for labor), when labor supply is along the extensive margin. The criteria from the social choice literature perform better in this regard than the traditional criteria, both in first and second best. More importantly, these equality of opportunity criteria push the second best policy away from an Earned Income Tax Credit and in the direction of a Negative Income tax.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2009064.

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Date of creation: 01 Oct 2009
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Handle: RePEc:cor:louvco:2009064
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