The Optimal Linear Income Tax Model

This paper compares the use of equivalent income with that of utility, in the social welfare function, in optimal income tax models. Equivalent income is a money metric welfare measure that, unlike utility, is not affected by monotonic transformations of utility. The use of equivalent income is found to produce an optimal tax rate that is more sensitive to the degree of inequality aversion, compared with the use of utility. With Cobb‐Douglas and CES utility functions, the optimal tax rate is the same for utility and equivalent income where relative inequality aversion is unity. When using equivalent incomes, the case for high marginal rates does not depend on the assumption of a very low elasticity of substitution between consumption and leisure

Consumption (sociology · Econometrics · Economics · Income elasticity of demand · Income tax · Marginal utility · Microeconomics · Monetary economics · Public economics · Tax rate · Welfare · Economic theories and models · Fiscal Policy and Economic Growth · Gender, Labor, and Family Dynamics