Assessing the Performance of an Income Tax
An indicator of the performance of a tax (and/or benefit) system in generating a high level of social welfare is proposed. Under standard assumptions on the form of the admissible social welfare functions, the indicator is shown to be increasing in the progressivity of the system. It is also increasing in the degree of aversion towards inequality when the tax system is progressive. Unlike most indices of tax progressivity, the indicator has the attractive feature of being an explicit function of the shape of social welfare preferences. Using household data from 1985 Britain, we then ask: (i) What can the performance of constant residual progression be? (ii) Relative to a proportional system, what is the performance of existing or proposed tax and benefit systems? (iii) How can we approximate the average residual progression of unevenly progressive tax and benefit systems?
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