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A comparison of optimal tax policies when compensation or responsibility matter

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  • JACQUET, Laurent

    (Norwegian School of Economics and Business Administration, Economics Department, Bergen, Norway)

  • VAN DE GAER, Dirk

    (SHERPPA, Faculteit Economie and Bedrijfskunde, Ghent University, Ghent, Belgium and Université catholique de Louvain, CORE, Louvain la Neuve, Belgium)

Abstract

This paper examines optimal redistribution in a model with high and low-skilled individuals with heterogeneous tastes for labor, that either work or not. With such double heterogeneity, traditional Welfarist criteria including Utilitarianism fail to take the compensation-responsibility trade-off into account. As a response, several other criteria have been proposed in the literature. This paper is the first to compare the extent to which optimal policies based on different normative criteria obey the principles of compensation (for differential skills) and responsibility (for preferences for labor), when labor supply is along the extensive margin. The criteria from the social choice literature perform better in this regard than the traditional criteria, both in first and second best. More importantly, these equality of opportunity criteria push the second best policy away from an Earned Income Tax Credit and in the direction of a Negative Income tax.

Suggested Citation

  • JACQUET, Laurent & VAN DE GAER, Dirk, 2009. "A comparison of optimal tax policies when compensation or responsibility matter," LIDAM Discussion Papers CORE 2009064, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2009064
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    Cited by:

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    2. Xavier Ramos & Dirk Van de gaer, 2012. "Empirical approaches to inequality of opportunity: Principles, measures, and evidence," Working Papers 259, ECINEQ, Society for the Study of Economic Inequality.
    3. Jacquet, Laurence & Van de Gaer, Dirk, 2011. "A comparison of optimal tax policies when compensation or responsibility matter," Journal of Public Economics, Elsevier, vol. 95(11), pages 1248-1262.
    4. Alain Trannoy, 2019. "Talent, equality of opportunity and optimal non-linear income tax," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 17(1), pages 5-28, March.
    5. Erwin OOGHE & Andreas PEICHL, 2010. "Fair and efficient taxation under partial control: theory and evidence," Working Papers of Department of Economics, Leuven ces10.32, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    6. Paolo Brunori & Flaviana Palmisano & Vito Peragine, 2014. "Income taxation and equity: New dominance criteria and an application to Romania," Working Papers 348, ECINEQ, Society for the Study of Economic Inequality.
    7. Alpaslan Akay & Olivier Bargain & H. Xavier Jara, 2020. "‘Fair’ welfare comparisons with heterogeneous tastes: subjective versus revealed preferences," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 55(1), pages 51-84, June.
    8. Kristoffer Berg & Paolo Giovanni Piacquadio, 2020. "The Equal-Sacrifice Social Welfare Function with an Application to Optimal Income Taxation," CESifo Working Paper Series 8505, CESifo.
    9. Erwin Ooghe & Andreas Peichl, 2015. "Fair and Efficient Taxation under Partial Control," Economic Journal, Royal Economic Society, vol. 125(589), pages 2024-2051, December.
    10. Laurence Jacquet & Dirk Van de Gaer, 2015. "Politiques fiscales optimales pour les bas revenus et principe de compensation," Revue économique, Presses de Sciences-Po, vol. 66(3), pages 579-600.
    11. Paolo Brunori & Flaviana Palmisano & Vito Peragine, 2022. "Income taxation and equity: new dominance criteria with a microsimulation application," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 20(3), pages 509-536, September.
    12. Obara, Takuya & 小原, 拓也 & Tsugawa, Shuichi & Managi, Shunsuke, 2019. "Envy-free Pricing for Impure Public Good," CCES Discussion Paper Series 69, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.
    13. Fleurbaey, Marc & Maniquet, François, 2015. "Optimal taxation theory and principles of fairness," LIDAM Discussion Papers CORE 2015005, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    14. Jaya Krishnakumar & Ricardo Nogales, 2020. "Public Policies and Equality of Opportunity for Wellbeing in Multiple Dimensions: A Theoretical Discussion and Evidence from Bolivia," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 149(1), pages 297-325, May.
    15. Giacomo Valletta, 2014. "Health, fairness and taxation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 43(1), pages 101-140, June.

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    Keywords

    optimal income taxation; equality of opportunity; heterogeneous preferences for labor;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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