Journal Article

Fair Income Tax

Marc Fleurbaey and François Maniquet

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 73, issue 1, pages 55-83
Published in print January 2006 | ISSN: 0034-6527
Published online January 2006 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2006.00369.x
Fair Income Tax

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In a model where agents have unequal skills and heterogeneous preferences over consumption and leisure, we look for the optimal tax on the basis of efficiency and fairness principles and under incentive-compatibility constraints. The fairness principles considered here are: (1) a weak version of the Pigou—Dalton transfer principle; (2) a condition precluding redistribution when all agents have the same skills. With such principles we construct and justify specific social preferences and derive a simple criterion for the evaluation of income tax schedules. Namely, the lower the greatest average tax rate over the range of low incomes, the better. We show that, as a consequence, the optimal tax should give the greatest subsidies to the working poor (the agents having the lowest skill and choosing the largest labour time).

Keywords: H21; H22; H24

Journal Article.  12568 words.  Illustrated.

Subjects: Taxation, Subsidies, and Revenue

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