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Fair income tax

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  • FLEURBAEY, Marc
  • MANIQUET, François

Abstract

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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Suggested Citation

  • FLEURBAEY, Marc & MANIQUET, François, 2006. "Fair income tax," LIDAM Reprints CORE 1845, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:1845
    DOI: 10.1111/j.1467-937X.2006.00369.x
    Note: In : Review of Economic Studies, 73, 55-83, 2006
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    References listed on IDEAS

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    1. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
    2. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059.
    3. François Maniquet & Yves Sprumont, 2004. "Fair Production and Allocation of an Excludable Nonrival Good," Econometrica, Econometric Society, vol. 72(2), pages 627-640, March.
    4. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, vol. 49(1), pages 47-73, October.
    5. Marc Fleurbaey, 2005. "The Pazner-Schmeidler social ordering: A defense," Review of Economic Design, Springer;Society for Economic Design, vol. 9(2), pages 145-166, April.
    6. Marc Fleurbaey & Maurice Salles & John A. Weymark, 2008. "Justice, Political Liberalism and Utilitarianism," Post-Print hal-00246415, HAL.
    7. Fleurbaey, Marc & Suzumura, Kotaro & 鈴村, 興太郎 & スズムラ, コウタロウ & Tadenuma, Koichi & 蓼沼, 宏一, 2000. "Informational Requirements for Social Choice in Economic Environments," Discussion Paper 2, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    8. 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.
    9. 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.
    10. Marc Fleurbaey & Francois Maniquet, 1999. "Cooperative production with unequal skills: The solidarity approach to compensation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 16(4), pages 569-583.
    11. 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.
    12. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
    13. M. Fleurbaey & F. Maniquet, 2008. "Fair social orderings," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 34(1), pages 25-45, January.
    14. Marc Fleurbaey & Alain Trannoy, 2003. "The impossibility of a Paretian egalitarian," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 21(2), pages 243-263, October.
    15. 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.
    16. Efraim Sadka, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 43(2), pages 261-267.
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