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Fair income tax

  • FLEURBAEY, Marc
  • MANIQUET, François

In a model where agents have unequal skills and heterogeneous preferences over consumption and leisure, we look for the optimal tax on the basis of efficiency and fairness principles and under incentive-compatibility constraints. The fairness principles considered here are: 1) a weak version of the Pigou-Dalton transfer principle; 2) a condition precluding redistribution when all agents have the same skills. With such principles we construct and justify specific social preferences and derive a simple criterion for the evaluation of income tax schedules. Namely, the lower the greatest average tax rate over the range of low incomes, the better. We show that, as a consequence, the optimal tax should give the greatest subsidies to the working poor (the agents having the lowest skill and choosing the largest labor time).

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File URL: http://dx.doi.org/10.1111/j.1467-937X.2006.00369.x
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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number 1845.

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Handle: RePEc:cor:louvrp:1845
Note: In : Review of Economic Studies, 73, 55-83, 2006
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  1. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, vol. 49(1), pages 47-73, October.
  2. Efraim Sadka, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 261-267.
  3. Marc Fleurbaey, 2005. "The Pazner-Schmeidler social ordering: A defense," Post-Print hal-00247024, HAL.
  4. Marc Fleurbaey & François Maniquet, 2008. "Fair social orderings," Post-Print hal-00246525, HAL.
  5. M. Fleurbaey & F. Maniquet, 2000. "Fair Social Orderings With Unequal Production Skills," THEMA Working Papers 2000-17, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  6. Diamond, P., 1994. "Optimal Income Taxation: An Exemple with a U-Shaped Pattern of Optimal Marginal Tax Rates," Working papers 94-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. M. Fleurbaey & A. Trannoy, 2000. "The Impossibility of a Paretian Egalitarian," THEMA Working Papers 2000-26, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  8. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059, June.
  9. Marc Fleurbaey & Maurice Salles & John Weymark, 2008. "Justice, Political Liberalism and Utilitarianism," Post-Print hal-00246415, HAL.
  10. Fleurbaey, Marc & Maniquet, Francois, 1996. "Fair allocation with unequal production skills: The No Envy approach to compensation," Mathematical Social Sciences, Elsevier, vol. 32(1), pages 71-93, August.
  11. MANIQUET, François & SPRUMONT, Yves, . "Fair production and allocation of an excludable nonrival good," CORE Discussion Papers RP 1735, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Fleurbaey, Marc & Suzumura, Kotaro & Tadenuma, Koichi, 2000. "Informational Requirements for Social Choice in Economic Environments," Discussion Paper 2, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  13. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  14. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
  15. Dirk Van de gaer & Marc Fleurbaey & Walter Bossert, 1999. "Responsibility, talent, and compensation: A second-best analysis," Review of Economic Design, Springer;Society for Economic Design, vol. 4(1), pages 35-55.
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