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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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    File URL: http://repec.tulane.edu/RePEc/pdf/tul2408.pdf
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    References listed on IDEAS

    as
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    4. Raj Chetty, 2012. "Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," Econometrica, Econometric Society, vol. 80(3), pages 969-1018, May.
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    Keywords

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    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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