Generalized Social Marginal Welfare Weights for Optimal Tax Theory

This paper proposes a new way to evaluate tax reforms, by aggregating losses and gains of different individuals using "generalized social marginal welfare weights." A tax system is optimal if no budget neutral small reform can increase the weighted sum of (money metric) gains and losses across individuals. Optimum tax formulas take the same form as standard welfarist tax formulas by simply substituting standard marginal social welfare weights with those generalized marginal social welfare weights. Weights directly capture society's concerns for fairness allowing us to cleanly separate individual utilities from social weights. Suitable weights can resolve puzzles of the traditional welfarist approach, as well as unify in an operational way the most prominent alternatives to utilitarianism such as Libertarianism, Rawlsianism, Equality of Opportunity, Poverty alleviation, or Fair Income Taxation. Generalized welfare weights can be specified to, among others, (1) provide a non-confiscatory theory of optimal taxation even absent any behavioral responses, (2) treat differently "deserved income" vs. "undeserved income," (3) distinguish between "deserving transfer beneficiaries" vs. "free loaders," (4) rule out the use of tags unless they create a Pareto improvement. We use a simple online survey to illustrate how to map social preferences of the public into weights.