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Pareto Efficient Tax Structures

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  • Dagobert L. Brito
  • Jonathan H. Hamilton
  • Steven M. Slutsky
  • Joseph E. Stiglitz

Abstract

Most analyses of optimal income taxation make restrictive technical assumptions on preferences (such as single-crossing) and only derive properties of welfare-maximizing tax schedules. Here, for an economy with any finite numbers of groups and commodities, Pareto efficient tax structures are described assuming only continuity and monotonicity of preferences. Most results follow directly from a property of self-selection: at an optimum, one group will never envy the bundle of another group which pays a larger total tax. The bundle of a group paying the largest total tax is undistorted. Assuming normality, undistorted outcomes for a group form a connected segment on the constrained utility possibility frontier. The tax structure at distorted outcomes is also described.

Suggested Citation

  • Dagobert L. Brito & Jonathan H. Hamilton & Steven M. Slutsky & Joseph E. Stiglitz, 1990. "Pareto Efficient Tax Structures," NBER Working Papers 3288, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3288
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    References listed on IDEAS

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    1. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
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    4. Brito, Dagobert L. & Hamilton, Jonathan H. & Slutsky, Steven M. & Stiglitz, Joseph E., 1995. "Randomization in optimal income tax schedules," Journal of Public Economics, Elsevier, vol. 56(2), pages 189-223, February.
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    1. Helmuth Cremer & Firouz Gahvari & Norbert Ladoux, 2001. "Second‐Best Pollution Taxes and the Structure of Preferences," Southern Economic Journal, John Wiley & Sons, vol. 68(2), pages 258-280, October.
    2. Bierbrauer, Felix & Brett, Craig & Weymark, John A., 2013. "Strategic nonlinear income tax competition with perfect labor mobility," Games and Economic Behavior, Elsevier, vol. 82(C), pages 292-311.
    3. da Costa, Carlos E. & Severo, Tiago, 2008. "Education, preferences for leisure and the optimal income tax schedule," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 113-138, February.
    4. Kokovin Sergey & Zhelobodko Evgeniy, 2008. "Overall Inefficiency and Cycles in Non-ordered Screening under Capacity Constraints and Standardization," EERC Working Paper Series 08/03e, EERC Research Network, Russia and CIS.
    5. Craig Brett & John A. Weymark, 2019. "Optimal nonlinear taxation of income and savings without commitment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 21(1), pages 5-43, February.
    6. Sergey Kokovin & Babu Nahata, 2017. "Method of Digraphs for Multi-dimensional Screening," Annals of Operations Research, Springer, vol. 253(1), pages 431-451, June.
    7. Brito, Dagobert L. & Hamilton, Jonathan H. & Slutsky, Steven M. & Stiglitz, Joseph E., 1995. "Randomization in optimal income tax schedules," Journal of Public Economics, Elsevier, vol. 56(2), pages 189-223, February.
    8. Andersson, Tommy, 2005. "Profit maximizing nonlinear pricing," Economics Letters, Elsevier, vol. 88(1), pages 135-139, July.
    9. Thomas Gaube, 2000. "Efficient Public Good Provision with Nonlinear Income Taxation," Econometric Society World Congress 2000 Contributed Papers 0850, Econometric Society.
    10. Helmuth Cremer & Maurice Marchand & Pierre Pestieau, 1996. "Interregional redistribution through tax surcharge," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(2), pages 157-173, May.
    11. Helmuth Cremer & Jean-Marie Lozachmeur & Pierre Pestieau, 2012. "Income taxation of couples and the tax unit choice," Journal of Population Economics, Springer;European Society for Population Economics, vol. 25(2), pages 763-778, January.
    12. Felix J. Bierbrauer & Pierre C. Boyer & Emanuel Hansen, 2023. "Pareto‐Improving Tax Reforms and the Earned Income Tax Credit," Econometrica, Econometric Society, vol. 91(3), pages 1077-1103, May.
    13. Kimmo Berg, 2013. "Complexity of solution structures in nonlinear pricing," Annals of Operations Research, Springer, vol. 206(1), pages 23-37, July.
    14. Joseph E. Stiglitz, 2004. "Information and the Change in the Paradigm in Economics, Part 2," The American Economist, Sage Publications, vol. 48(1), pages 17-49, March.
    15. Schroyen, Fred, 1997. "Pareto efficient income taxation under costly monitoring," Journal of Public Economics, Elsevier, vol. 65(3), pages 343-366, September.
    16. Craig Brett, 2007. "Optimal nonlinear taxes for families," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(3), pages 225-261, June.
    17. Stiglitz, Joseph E., 2018. "Pareto efficient taxation and expenditures: Pre- and re-distribution," Journal of Public Economics, Elsevier, vol. 162(C), pages 101-119.
    18. Henrik Jordahl & Luca Micheletto, 2005. "Optimal Utilitarian Taxation and Horizontal Equity," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(4), pages 681-708, October.
    19. Stiglitz, Joseph E., 2002. "New perspectives on public finance: recent achievements and future challenges," Journal of Public Economics, Elsevier, vol. 86(3), pages 341-360, December.
    20. Kokovin, S. & Nahata, B. & Zhelobodko, E., 2011. "All Solution Graphs in Multidimensional Screening," Journal of the New Economic Association, New Economic Association, issue 11, pages 10-38.
    21. Andersson, Tommy, 2004. "Essays on Nonlinear Pricing and Welfare," MPRA Paper 59446, University Library of Munich, Germany.
    22. Thomas Gaube, 2005. "Financing Public Goods with Income Taxation: Provision Rules vs. Provision Level," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(3), pages 319-334, May.
    23. Stefan Homburg, 2001. "The Optimal Income Tax: Restatement and Extensions," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(4), pages 363-395, November.
    24. Yukihiro Nishimura, 2008. "Envy Minimization In The Optimal Tax Context," Working Paper 1178, Economics Department, Queen's University.
    25. Etro, Federico, 2017. "Research in economics and game theory. A 70th anniversary," Research in Economics, Elsevier, vol. 71(1), pages 1-7.

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