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Sacrifice and efficiency of the income tax schedule

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  • Costa, Carlos Eugênio da
  • Pereira, Thiago Neves

Abstract

We investigate the efficiency of equal sacrifice tax schedules in an economy which primitives are exactly those in Mirrlees (1971): a continuum of individuals with identical preferences defined over consumption and leisure who differ with respect to their labor market productivity. Using a separable specification for preferences we derive the minimum equal sacrifice allocation and recover the tax schedule that implements it. The separable specification allows us to use the methodology developed by Werning (2007b) to check whether the schedule is efficient, that is, whether there is no alternative tax schedule that raises more revenue while delivering less utility to no one. We find that inefficiency does not arise for most parametrizations we use to approximate the US economy. For the few cases for which inefficiency does arise, it does so only for very high levels of income and marginal tax rates.

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  • Costa, Carlos Eugênio da & Pereira, Thiago Neves, 2011. "Sacrifice and efficiency of the income tax schedule," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 725, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    • Handle: RePEc:fgv:epgewp:725
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    References listed on IDEAS

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    1. Berliant, Marcus & Gouveia, Miguel, 1993. "Equal sacrifice and incentive compatible income taxation," Journal of Public Economics, Elsevier, vol. 51(2), pages 219-240, June.
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    Cited by:

    1. Normann Lorenz & Dominik Sachs, 2012. "Optimal Participation Taxes and Efficient Transfer Phase-Out," Working Paper Series of the Department of Economics, University of Konstanz 2012-37, Department of Economics, University of Konstanz.

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