Normative dimensions of optimal income taxation using observable variables: a step from theory to practice
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2020-08-13
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en
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Traditional welfarist models of optimal income taxation have little room for normative input and are sensitive to changes in unobservable variables. This study explores normative dimensions of optimal income taxation while using completely observable variables. Specifically, a non-welfarist model is presented which constructs optimal income taxation schemes using the distribution of earnings, taxable income elasticity, and the normative tastes of the policymaker. The model is significantly easier to use than most traditional models due to the abandoning of the welfarist objective. Generalized social marginal welfare weights are used to describe the redistributive preferences of policymakers following seven unique principles of distributive justice. Additionally, different distributions of earnings with varying degrees of earnings inequality and different levels of taxable income elasticity are considered. Optimal marginal tax schemes are found to be sensitive to normative input and the shape of the earnings distribution, suggesting L-shaped, as opposed to U-shaped, patterns of optimal marginal tax rates under some circumstances. Policymakers could use the model for guidance on preferred tax reforms based on efficiency or normative grounds.
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Faculteit der Managementwetenschappen