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Pareto-Improvements, Welfare Trade-Offs and the Taxation of Couples

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  • Bierbrauer, Felix
  • Boyer, Pierre
  • ,
  • Weishaar, Daniel

Abstract

We develop a theory of tax reforms for a setting with multi-dimensional heterogeneity amongst taxpayers and multiple economic decisions that are all subject to fixed and variable costs. The theorems in this paper provide a complete characterization of the conditions under which Pareto- or welfare-improving tax reforms exist. We focus on one application, the taxation of couples, and present a detailed analysis of the behavioral responses to taxation in this setting. Squaring the theorems with this analysis yields sufficient statistics for the existence of Pareto- or welfare-improving tax reforms. In the empirical part, we apply them to US data. Our findings include the following: Tax rates on secondary earnings are inefficiently high when secondary earnings are close to primary earnings. Also, reducing the tax system's degree of jointness is not Pareto-improving. Whether it raises welfare depends on a trade-off between poverty alleviation and gender balance.

Suggested Citation

  • Bierbrauer, Felix & Boyer, Pierre & , & Weishaar, Daniel, 2024. "Pareto-Improvements, Welfare Trade-Offs and the Taxation of Couples," CEPR Discussion Papers 19750, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19750
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    Keywords

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    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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