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Optimal Taxation According to Equality of Opportunity: a Microeconometric Simulation Analysis

  • Rolf Aaberge
  • Ugo Colombino
  • John E. Roemer

The purpose of this paper is to introduce and adopt a generalised version of Roemer's (1998) Equality of Opportunity (EOp) framework for analysing optimal income taxation. EOp optimal tax rules seek to equalise income differentials arising from factors beyond the control of the individual. Unlike the pure EOp criterion of Roemer (1998) the generalised EOp criterion allows for alternative weighting profiles in the treatment of income differentials between and within types when types are defined by circumstances that are beyond people's control. An empirical microeconometric model of labour supply in Italy is used to simulate and identify optimal tax rules within classes of two- and three-parameter tax rules. A rather striking result of the analysis is that the optimal tax rule turns out to be the pure lump-sum tax, under Roemer's pure EOp criterion as well as under the generalised EOp criterion with moderate degrees of aversion to within-type inequality. A high degree of within-type inequality aversion instead produces EOp-optimal rules with positive marginal tax rates. When the EOp-version of the Gini welfare function is adopted as Eop criterion, the optimal tax rule turns out to be close to the actual 1993 Italian tax system, if not for the important difference of prescribing a universal lump-sum positive transfer of 3,500,000 ITL, which has no comparable counterpart in the actual system. On the other hand, when using the conventional equality of outcome (EO) criterion, the pure lump-sum tax always turns out to be optimal, at least with respect to the classes of two- and three-parameter rules. We also compute second-best solutions, namely we exclude lump-sum taxes. Overall, the results do not conform to the perhaps common expectation that the EO criterion is more supportive of “interventionist” (redistributive) policies than an EOp approach.

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Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 05-2003.

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Length: 27 pages
Date of creation: Feb 2003
Date of revision:
Handle: RePEc:icr:wpicer:05-2003
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  1. Mehran, Farhad, 1976. "Linear Measures of Income Inequality," Econometrica, Econometric Society, vol. 44(4), pages 805-09, July.
  2. Ebert, Udo, 1987. "Size and distribution of incomes as determinants of social welfare," Journal of Economic Theory, Elsevier, vol. 41(1), pages 23-33, February.
  3. repec:ese:iserwp:2000-19 is not listed on IDEAS
  4. Aaberge, Rolf, 2001. "Axiomatic Characterization of the Gini Coefficient and Lorenz Curve Orderings," Journal of Economic Theory, Elsevier, vol. 101(1), pages 115-132, November.
  5. Yaari, Menahem E., 1988. "A controversial proposal concerning inequality measurement," Journal of Economic Theory, Elsevier, vol. 44(2), pages 381-397, April.
  6. Checchi, Daniele & Fiorio, Carlo V. & Leonardi, Marco, 2008. "Intergenerational Persistence in Educational Attainment in Italy," IZA Discussion Papers 3622, Institute for the Study of Labor (IZA).
  7. Roemer, J.E., 1992. "A Pragmatic Theory of Responsibility for the Egalitarian Planner," Papers 391, California Davis - Institute of Governmental Affairs.
  8. Rolf Aaberge, 2007. "Gini’s nuclear family," Journal of Economic Inequality, Springer, vol. 5(3), pages 305-322, December.
  9. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
  10. Checchi, Daniele & Peragine, Vito, 2005. "Regional Disparities and Inequality of Opportunity: The Case of Italy," IZA Discussion Papers 1874, Institute for the Study of Labor (IZA).
  11. John E. Roemer, . "To What Extent Do Fiscal Regimes Equalize Opportunities For Income Acquisition Among Citizens," Department of Economics 00-03, California Davis - Department of Economics.
  12. Sen, Amartya, 1974. "Informational bases of alternative welfare approaches : Aggregation and income distribution," Journal of Public Economics, Elsevier, vol. 3(4), pages 387-403, November.
  13. Donaldson, David & Weymark, John A., 1983. "Ethically flexible gini indices for income distributions in the continuum," Journal of Economic Theory, Elsevier, vol. 29(2), pages 353-358, April.
  14. Aaberge, R. & Colombino, U. & Strom, S. & Wennemo, T., 1998. "Evaluating alternative tax reforms in Italy with a model of joint labor supply of married couples," Structural Change and Economic Dynamics, Elsevier, vol. 9(4), pages 415-433, December.
  15. Hey, John D & Lambert, Peter J, 1980. "Relative Deprivation and the Gini Coefficient: Comment," The Quarterly Journal of Economics, MIT Press, vol. 95(3), pages 567-73, November.
  16. Donaldson, David & Weymark, John A., 1980. "A single-parameter generalization of the Gini indices of inequality," Journal of Economic Theory, Elsevier, vol. 22(1), pages 67-86, February.
  17. Weymark, John A., 1981. "Generalized gini inequality indices," Mathematical Social Sciences, Elsevier, vol. 1(4), pages 409-430, August.
  18. Rolf Aaberge, 2000. "Characterizations of Lorenz curves and income distributions," Social Choice and Welfare, Springer, vol. 17(4), pages 639-653.
  19. Aaberge, Rolf & Colombino, Ugo & Strom, Steinar, 1999. "Labour Supply in Italy: An Empirical Analysis of Joint Household Decisions, with Taxes and Quantity Constraints," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(4), pages 403-22, July-Aug..
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