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Incentive compatible income taxation, individual revenue requirements and welfare

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  • Berliant, Marcus
  • Gouveia, Miguel

Abstract

This paper introduces the classical Public Finance concept of taxation according to ability to pay in the set-up of standard optimal income tax models. The fundamental concept used is the specification of an individual revenue requirement function, a mapping from abilities to taxes. The discussion is centered on the derivation of a tax function on income such that agents of a given ability pay exactly the amount specified by the revenue requirement function. The construction of the tax function is achieved by using the differentiable approach to the revelation principle. A basic differential equation is generated from which the tax function is found. A discussion of the necessary and sufficient conditions for the validity of this technique and an interpretation of the results in graphs are provided. A welfare ranking of the solutions is used to select the best tax function that implements the individual revenue requirements.

Suggested Citation

  • Berliant, Marcus & Gouveia, Miguel, 2001. "Incentive compatible income taxation, individual revenue requirements and welfare," MPRA Paper 84374, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:84374
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    References listed on IDEAS

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    1. Berliant, M. & Page, F.H., 2001. "Income Taxes and Provision of Public Goods: Optima with Balanced Goverment Budgets," Papiers d'Economie Mathématique et Applications 2001.37, Université Panthéon-Sorbonne (Paris 1).
    2. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
    3. Lollivier, Stefan & Rochet, Jean-Charles, 1983. "Bunching and second-order conditions: A note on optimal tax theory," Journal of Economic Theory, Elsevier, vol. 31(2), pages 392-400, December.
    4. Border, Kim C, 1991. "Implementation of Reduced Form Auctions: A Geometric Approach," Econometrica, Econometric Society, vol. 59(4), pages 1175-1187, July.
    5. Berliant, M. & Gouveia, M., 1991. "On Political Economy of Income Taxation," RCER Working Papers 288, University of Rochester - Center for Economic Research (RCER).
    6. Berliant, Marcus & Gouveia, Miguel, 1993. "Equal sacrifice and incentive compatible income taxation," Journal of Public Economics, Elsevier, vol. 51(2), pages 219-240, June.
    7. Berliant, Marcus, 1992. "On income taxation and the core," Journal of Economic Theory, Elsevier, vol. 56(1), pages 121-141, February.
    8. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-261, March.
    9. Berliant, Marcus & Page, Frank Jr., 1996. "Incentives and income taxation: the implementation of individual revenue requirement functions," Ricerche Economiche, Elsevier, vol. 50(4), pages 389-400, December.
    10. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
    11. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
    12. Efraim Sadka, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 43(2), pages 261-267.
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    Cited by:

    1. Joseph E. Mullat, 2001. "Judging Social Welfare Policy with the Solving of the Bargaining Problem," Public Economics 0112007, University Library of Munich, Germany, revised 04 Mar 2006.
    2. Kranich, Laurence, 1997. "Equalizing opportunities through public education when innate abilities are unobservable," UC3M Working papers. Economics 7216, Universidad Carlos III de Madrid. Departamento de Economía.
    3. Waly Wane, 2002. "Income Taxation and Tax Evasion in a Finite Economy," Annals of Economics and Finance, Society for AEF, vol. 3(2), pages 407-431, November.
    4. George R.G. Clarke, 2003. "The Effect of Medicaid On Cash Assistance To the Aged and Disabled Poor," Public Finance Review, , vol. 31(1), pages 3-43, January.
    5. Marcus Berliant & Pierre C. Boyer, 2024. "Politics and income taxes: Progress and progressivity," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 26(4), August.
    6. Berliant, M. & Gouveia, M., 1991. "On Political Economy of Income Taxation," RCER Working Papers 288, University of Rochester - Center for Economic Research (RCER).
    7. Berliant, Marcus & Gouveia, Miguel, 2022. "On the Political Economy of Nonlinear Income Taxation," MPRA Paper 113140, University Library of Munich, Germany.
    8. Berliant, M. & Page Jr., F.H., 1997. "Optimal budget balancing income tax mechanisms and the provision of public goods," Other publications TiSEM 5ac85c5c-087f-4f74-919d-9, Tilburg University, School of Economics and Management.
    9. Berliant, M. & Page Jr., F.H., 1997. "Optimal budget balancing income tax mechanisms and the provision of public goods," Other publications TiSEM 5ac85c5c-087f-4f74-919d-9, Tilburg University, School of Economics and Management.

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    More about this item

    Keywords

    Incentive compatibility; Income taxation; Revenue requirements; Welfare;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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