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Normative judgments implicit in the tax system: A simulation approach

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  • Isaak, Niklas
  • Jessen, Robin

Abstract

How much does society value redistribution? The common method to derive inverse-optimum welfare weights is by inverting an optimal-tax model. Our alternative imposes fewer restrictions on labor supply and enables comparisons across household types. We use a structural labor supply model to calculate the marginal value of public funds for various small tax reductions, directly linked to welfare weights. An application to Germany finds: i) The tax-transfer system is optimal if society values one additional Euro for the bottom decile three times as much as for the median. ii) At low-medium incomes, weights for couples exceed those for singles substantially

Suggested Citation

  • Isaak, Niklas & Jessen, Robin, 2024. "Normative judgments implicit in the tax system: A simulation approach," Ruhr Economic Papers 1128, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:311299
    DOI: 10.4419/96973310
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    More about this item

    Keywords

    Inverse optimum; microsimulation; marginal value of public funds; social welfare function; optimal taxation; labor supply; efficiency;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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