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On the Definition of Tax Neutrality: Distributional and Welfare Implications of Policy Alternatives

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Listed:
  • John P. Formby

    (University of Alabama)

  • W. James Smith

    (University of Colorado-Denver)

  • Paul D. Thistle

    (University of Alabama)

Abstract

The fairness of a tax change is often judged by examining its impact on tax burdens or net incomes of different income classes. Two competing definitions of tax neutrality give surprisingly different and conflicting answers to the fairness ques tion. If the objective is to maximize welfare, the Lorenz dominance principle offers guidance as to how tax neutrality should be defined. In the presence of asymmetric information the different definitions of tax neutrality make it possible for politicians to adopt the definition that favors their constituency and/or serves a particular political agenda. The median voter model is applied to explore the definition of neutrality in a democracy. In general, decisions by rational self-interested voters and politicians may, but do not necessarily, result in the definition that leads to Lorenz dominance.

Suggested Citation

  • John P. Formby & W. James Smith & Paul D. Thistle, 1992. "On the Definition of Tax Neutrality: Distributional and Welfare Implications of Policy Alternatives," Public Finance Review, , vol. 20(1), pages 3-23, January.
    • Handle: RePEc:sae:pubfin:v:20:y:1992:i:1:p:3-23
    DOI: 10.1177/109114219202000101
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    References listed on IDEAS

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    Cited by:

    1. Samuel Calonge & Oriol Tejada, 2011. "A Differential Redistributive Analysis of Bilinear Dual-Income-Tax Reforms," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(3), pages 193-224, September.
    2. John P. Formby & Steven G. Medema & W. James Smith, 1995. "Tax Neutrality and Social Welfare in a Comptutational General Equilibrium Framework," Public Finance Review, , vol. 23(4), pages 419-447, October.
    3. Hayes, Kathy J. & Lambert, Peter J. & Slottje, Daniel J., 1995. "Evaluating effective income tax progression," Journal of Public Economics, Elsevier, vol. 56(3), pages 461-474, March.
    4. Nuria Badenes & Julio López-Laborda & Jorge Onrubia & Jesús Ruiz-Huerta, 2001. "Simplification and Decentralization of the Income Tax," Public Finance Review, , vol. 29(1), pages 49-60, January.

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