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Designing Optimal Taxes With a Microeconometric Model of Household Labour Supply

  • Rolf Aaberge

    (Research Department, Statistics Norway, Oslo, Norway)

  • Ugo Colombino

    (CHILD, Department of Economics, Turin, Italy)

This paper is concerned with the empirical analyses of optimal taxation, adopting Equality of Outcome (EO) as well as Equality of Opportunity (EOp) as evaluation criteria. The EOp- and EO-criteria provide alternative methods for summarizing the efficiency-equality trade-off in the distribution of individual welfare. We also compare the results depending on whether we use income or money-metric utility as a measure of individual welfare. We estimate micro-econometric models of household labour supply and corresponding individual welfare measures based on 1995 Norwegian data for both married couples and singles. We then use these models to simulate behavioural responses and welfare gains and losses of various constant-revenue four-parameter tax rules, i.e. the tax rules defined by a lump-sum transfer (positive or negative), two marginal tax rates and a “kink point” that produces the same revenue collected with the observed 1995 rules. Using the various EOp- and EO- critera as a basis for evaluating and comparing these tax rules, EOp- and EO-optimal tax rules are identified.

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File URL: http://econwpa.repec.org/eps/pe/papers/0510/0510013.pdf
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Paper provided by EconWPA in its series Public Economics with number 0510013.

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Length: 29 pages
Date of creation: 13 Oct 2005
Handle: RePEc:wpa:wuwppe:0510013
Note: Type of Document - pdf; pages: 29
Contact details of provider: Web page: http://econwpa.repec.org

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