Review of Economic Studies Vol. 73 No. 1 2006
Fair Income Tax
Abstract
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).
- DOI
- 10.1111/j.1467-937x.2006.00369.x
- Volume
- 73
- Issue
- 1
- Pages
- 55-83
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref