Preference responsibility versus poverty reduction in the taxation of labor incomes

• Published in: Journal of public economics Vol. 197; p. 104386
• Main Authors: Henry de Frahan, Lancelot, Maniquet, François
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-05-2021
• Subjects: optimal taxation; poverty reduction; responsibility; D63; responsibility; H21; poverty reduction; optimal taxation
• ISSN: 0047-2727; 1879-2316
• DOI: 10.1016/j.jpubeco.2021.104386

•We use fairness axioms to build a social welfare function.•Our axioms are: Pareto efficiency, preference responsibility and poverty reduction.•Tax rates jump at the earning level of a minimum wage household working full-time.•Our optimal tax scheme is similar to the current income tax in the United States.•A fairness-based approach can close the gap between policy and optimal tax theory.
We study the tax schemes that maximize social welfare functions built on axioms of responsibility for one’s preferences (the requirement that the social welfare function should treat identically agents with the same wage, independently of their preferences) and poverty reduction. We find zero and negative marginal tax rates on low incomes at the optimum and bunching at the income level of the most hardworking minimum wage households. When preferences are iso-elastic, we derive the optimal tax formula, which we calibrate to the US economy. Our formula approximates the shape of the current US tax function for households with at least one child. This result suggests that a fairness-based approach, and these axioms in particular, can help close the gap between the recommendations of optimal tax theory and actual policies.