Elasticity determinants of inequality-reducing income taxation

The link between income inequality and progressive taxation has long been considered a fundamental normative foundation for income tax progressivity. This paper furnishes necessary and sufficient conditions on primitives, in terms of the elasticity of income with respect to ability, under which vari...

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Bibliographic Details
Published in:Journal of economic inequality 2021-03, Vol.19 (1), p.163-183
Main Authors: Carbonell-Nicolau, Oriol, Llavador, Humberto
Format: Article
Language:English
Subjects:
Consumer behavior
Consumer preferences
Development Economics
Economic Growth
Economic incentives
Economics
Economics and Finance
Elasticity (Economics)
Income distribution
Income tax
Inequality
International Economics
Political Science
Progressive taxes
Public Finance
Tax law
Tax rates
Taxation
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Summary:The link between income inequality and progressive taxation has long been considered a fundamental normative foundation for income tax progressivity. This paper furnishes necessary and sufficient conditions on primitives, in terms of the elasticity of income with respect to ability, under which various subclasses of progressive taxes are inequality reducing. The distributional effects of progressive income taxation are decomposed into two conditions on the wage elasticity of income, the tax rate effect and the subsidy effect , each capturing different aspects of the transition between before-tax and after-tax income distributions. The results confer a degree of useful flexibility to the theory, in that they allow the analyst to expand the universe of consumer preferences by suitably restricting the set of marginal-rate progressive taxes. As an illustration of the results’ practical implications, we provide a precise characterization of the subclass of (progressive) taxes that are inequality reducing for the constant elasticity of substitution (CES) and the quasi-linear utility functions.
ISSN:1569-1721
1573-8701
DOI:10.1007/s10888-020-09461-8