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Inequality Aversion, Externalities, and Pareto-Efficient Income taxation

Abstract
Abstract This paper analyzes Pareto-efficient marginal income taxation taking into account externalities induced through individual inequality aversion, meaning that people have preferences for equality. In doing so, we distinguish between four different and widely used models of inequality aversion. The results show that empirically and experimentally quantified degrees of inequality aversion have potentially very strong implications for Pareto-efficient marginal income taxation. It also turns out that the type of inequality aversion (self-centered vs. non-self-centered), and the specific measures of inequality used, matter a great deal. For example, based on simulation results mimicking the disposable income distribution in the U.S., the preferences suggested by Fehr and Schmidt (1999) imply monotonically increasing marginal income taxes, with large negative marginal tax rates for low-income individuals and large positive marginal tax rates for high-income ones. In contrast, the in many respects comparable model by Bolton and Ockenfels (2000) implies close to zero marginal income tax rates for all.
Other description
JEL Classification: D03, D62, H23.
URI
http://hdl.handle.net/2077/64460
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  • Working papers
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gupea_2077_64460_1.pdf (3.069Mb)
Date
2020-05
Author
Aronsson, Thomas
Johansson-Stenman, Olof
Keywords
Pareto-efficient taxation
Inequality aversion
Self-centered inequality aversion
Non-self-centered inequality aversion
Fehr and Schmidt preferences
Bolton and Ockenfels preferences
GINI coefficient
Coefficient of variation
Publication type
report
ISSN
1403-2465
Series/Report no.
Working Papers in Economics
785
Language
eng
Metadata
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