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A General Theory of Inverse Welfare Functions

Author

Listed:
  • Katy Bergstrom

    (Tulane University)

  • William Dodds

    (Tulane University)

Abstract

This paper develops a general theory to recover the inverse welfare function that rationalizes a given tax schedule as optimal. Our theory allows for complex environments including the presence of multidimensional tax schedules, bunching/jumping behavior, optimization frictions, general equilibrium effects, and externalities. We show how inverse welfare functions can be used to assess the desirability of tax reforms and to test for Pareto efficiency. We numerically construct several inverse welfare functions for piecewise-linear income taxation, taxation with optimization frictions, joint income and property taxation, income taxation with labor demand and endogenous wages, and taxation with inequality aversion.

Suggested Citation

  • Katy Bergstrom & William Dodds, 2024. "A General Theory of Inverse Welfare Functions," Working Papers 2408, Tulane University, Department of Economics.
    • Handle: RePEc:tul:wpaper:2408
    as

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    References listed on IDEAS

    as
    1. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2013. "Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 1-56.
    2. Mikhail Golosov & Aleh Tsyvinski & Nicolas Werquin, 2014. "A Variational Approach to the Analysis of Tax Systems," NBER Working Papers 20780, National Bureau of Economic Research, Inc.
    3. Katy Bergstrom & William Dodds, 2021. "Using Labor Supply Elasticities to Learn about Income Inequality: The Role of Productivities versus Preferences," American Economic Journal: Economic Policy, American Economic Association, vol. 13(3), pages 28-62, August.
    4. Havranek, Tomas & Irsova, Zuzana & Laslopova, Lubica & Zeynalova, Olesia, 2020. "The Elasticity of Substitution between Skilled and Unskilled Labor: A Meta-Analysis," MPRA Paper 102598, University Library of Munich, Germany.
    5. Normann Lorenz & Dominik Sachs, 2016. "Identifying Laffer Bounds: A Sufficient-Statistics Approach with an Application to Germany," Scandinavian Journal of Economics, Wiley Blackwell, vol. 118(4), pages 646-665, October.
    6. Rochet, Jean-Charles, 1987. "A necessary and sufficient condition for rationalizability in a quasi-linear context," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 191-200, April.
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    More about this item

    Keywords

    inverse welfare function; inverse welfare weights; frictions; multidimensional taxation; general equilibrium; Pareto efficiency;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • D60 - Microeconomics - - Welfare Economics - - - General

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