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Proportional Income Taxation and Effective Progressivity

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Abstract

When incomes are exogenously given, a progressive tax structure reduces inequality in the sense that the Lorenz curve of after tax incomes is nowhere below that of before tax incomes whatever the circumstances as it was shown by U. Jakobsson (Journal of Public Economics 5 (1976), 161-168) The relevance of this standard result is however seriously limited since real-world incomes are determined by the working decisions of the agents in the economy. The paper aims at investigating the implications for effective progression of relaxing the assumption of exogenous incomes when individuals have the same preferences but different talents. We first extend the standard result to the case where agents' working decisions are fully taken into account and we conclude that it is generally impossible to disentangle the respective contributions to inequality reduction of the tax schedule and agents' preferences. We next demonstrate that an elasticity of labour supply which is non-decreasing in productivities is both necessary and sufficient for a proportional tax schedule to result in less unequally distributed incomes. Journal of Economic Literature

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  • Udo Ebert & Patrick Moyes, 2003. "Proportional Income Taxation and Effective Progressivity," IDEP Working Papers 0309, Institut d'economie publique (IDEP), Marseille, France.
  • Handle: RePEc:iep:wpidep:0309
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    1. Jorge Onrubia & Rafael Salas & José Sanz, 2005. "Redistribution and labour supply," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 3(2), pages 109-124, August.
    2. Fellman, J, 1976. "The Effect of Transformations on Lorenz Curves," Econometrica, Econometric Society, vol. 44(4), pages 823-824, July.
    3. Kakwani, Nanak C, 1977. "Applications of Lorenz Curves in Economic Analysis," Econometrica, Econometric Society, vol. 45(3), pages 719-727, April.
    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. Tuomala, Matti, 1984. "On the optimal income taxation : Some further numerical results," Journal of Public Economics, Elsevier, vol. 23(3), pages 351-366, April.
    6. Stern, N. H., 1976. "On the specification of models of optimum income taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 123-162.
    7. Eichhorn, Wolfgang & Funke, Helmut & Richter, Wolfram F., 1984. "Tax progression and inequality of income distribution," Journal of Mathematical Economics, Elsevier, vol. 13(2), pages 127-131, October.
    8. Moyes Patrick, 1994. "Inequality Reducing and Inequality Preserving Transformations of Incomes: Symmetric and Individualistic Transformations," Journal of Economic Theory, Elsevier, vol. 63(2), pages 271-298, August.
    9. Jakobsson, Ulf, 1976. "On the measurement of the degree of progression," Journal of Public Economics, Elsevier, vol. 5(1-2), pages 161-168.
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    Keywords

    Endogenous incomes; Labour supply; Redistribution; Taxation; Inequality; Progressivity;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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