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The Undesirability of Randomized Income Taxation under Decreasing Risk Aversion

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  • Martin Hellwig

    (Max Planck Institute for Research on Collective Goods, Bonn)

Abstract

For the standard specification of the utilitarian optimal income tax problem with hidden characteristics, the paper shows that randomized tax schemes are undesirable if preferences exhibit a property of weakly decreasing risk aversion according to the multidimensional risk aversion concept of Hellwig (2004). The property of decreasing risk aversion also implies uniqueness of the optimal income tax schedule and continuity in cases where the type distribution has a continuous density.

Suggested Citation

  • Martin Hellwig, 2005. "The Undesirability of Randomized Income Taxation under Decreasing Risk Aversion," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2005_27, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2005_27
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    References listed on IDEAS

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    1. Hellwig, Martin F., 2007. "A contribution to the theory of optimal utilitarian income taxation," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1449-1477, August.
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    Cited by:

    1. Stéphane Gauthier & Guy Laroque, 2022. "Optimal Random Taxation and Redistribution," SciencePo Working papers Main hal-03915336, HAL.
    2. Casey Rothschild & Florian Scheuer, 2014. "A Theory of Income Taxation under Multidimensional Skill Heterogeneity," NBER Working Papers 19822, National Bureau of Economic Research, Inc.
    3. Laurent Simula, 2010. "Optimal nonlinear income tax and nonlinear pricing: optimality conditions and comparative static properties," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 35(2), pages 199-220, July.
    4. Martin F. Hellwig, 2010. "Utilitarian mechanism design for an excludable public good," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(3), pages 361-397, September.
    5. Matthias Lang, 2023. "Stochastic contracts and subjective evaluations," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 104-134, March.
    6. Stéphane Gauthier & Guy Laroque, 2021. "Certainty Equivalence and Noisy Redistribution," SciencePo Working papers Main halshs-03359574, HAL.
    7. Laurence Ales & Kurnaz Musab & Sleet Christopher, "undated". "Task, Talent, and Taxes," GSIA Working Papers 2014-E16, Carnegie Mellon University, Tepper School of Business.
    8. Hellwig, Martin F., 2007. "A contribution to the theory of optimal utilitarian income taxation," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1449-1477, August.
    9. Johanna Hey & Schreiber,Ulrich & Fabian Pönnighaus & Felix Bierbrauer, 2013. "Tax Havens and “Legal Tax Avoidance”: How Can Fairer Taxation Be Achieved?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 66(11), pages 03-13, June.
    10. Gauthier, Stéphane & Laroque, Guy, 2014. "On the value of randomization," Journal of Economic Theory, Elsevier, vol. 151(C), pages 493-507.
    11. Hakenes, Hendrik & Schnabel, Isabel, 2006. "The Threat of Capital Drain: A Rationale for Public Banks?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 107, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    12. Slemrod, Joel & Traxler, Christian, 2010. "Optimal observability in a linear income tax," Economics Letters, Elsevier, vol. 108(2), pages 105-108, August.
    13. Nolan Miller & Alexander Wagner & Richard Zeckhauser, 2013. "Solomonic separation: Risk decisions as productivity indicators," Journal of Risk and Uncertainty, Springer, vol. 46(3), pages 265-297, June.
    14. Gemmo, Irina & Kubitza, Christian & Rothschild, Casey, 2020. "Constrained efficient equilibria in selection markets with continuous types," Journal of Public Economics, Elsevier, vol. 190(C).
    15. Felix Bierbrauer, 2010. "On the Optimality of Optimal Income Taxation," CESifo Working Paper Series 3163, CESifo.
    16. repec:hal:pseose:hal-00969344 is not listed on IDEAS
    17. Felix J., Bierbrauer, 2011. "On the optimality of optimal income taxation," Journal of Economic Theory, Elsevier, vol. 146(5), pages 2105-2116, September.
    18. Wladislaw Mill & Cornelius Schneider, 2023. "The Bright Side of Tax Evasion," CESifo Working Paper Series 10615, CESifo.
    19. Laurence Ales & Soo‐Haeng Cho & Ersin Körpeoğlu, 2021. "Innovation Tournaments with Multiple Contributors," Production and Operations Management, Production and Operations Management Society, vol. 30(6), pages 1772-1784, June.
    20. Thomas Koch & Javier Birchenall, 2016. "Taking versus taxing: an analysis of conscription in a private information economy," Public Choice, Springer, vol. 167(3), pages 177-199, June.
    21. Tobias Huber & Johannes G. Jaspersen & Andreas Richter & Dennis Strümpel, 2023. "On the change of risk aversion in wealth: a field experiment in a closed economic system," Experimental Economics, Springer;Economic Science Association, vol. 26(1), pages 1-26, March.
    22. Martin Hellwig, 2008. "A Maximum Principle for Control Problems with Monotonicity Constraints," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2008_04, Max Planck Institute for Research on Collective Goods.
    23. Gemmo, Irina & Kubitza, Christian & Rothschild, Casey G., 2018. "The existence of the Miyazaki-Wilson-Spence equilibrium with continuous type distributions," ICIR Working Paper Series 32/18, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).

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    More about this item

    Keywords

    Optimal Income Taxation; Randomized Incentive Schemes; Nonincreasing Risk Aversion;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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