Inequality reducing properties of progressive income tax schedules: The case of endogenous income

Oriol Carbonell-Nicolau, Humberto Llavador

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

The case for progressive income taxation is often based on the classic result of Jakobsson, 1976 and Fellman, 1976, according to which progressive and only progressive income taxes—in the sense of increasing average tax rates on income—ensure a reduction in income inequality. This result has been criticized on the grounds that it ignores the possible disincentive effect of taxation on work effort, and the resolution of this critique has been a longstanding problem in public finance. This paper provides a normative rationale for progressivity that takes into account the effect of an income tax on labor supply. It shows that a tax schedule is inequality reducing only if it is progressive—in the sense of increasing marginal tax rates on income—and identifies a necessary and sufficient condition on primitives under which progressive and only progressive taxes are inequality reducing.

Original languageEnglish (US)
Pages (from-to)39-60
Number of pages22
JournalTheoretical Economics
Volume13
Issue number1
DOIs
StatePublished - Jan 2018

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance(all)

Keywords

  • Progressive taxation
  • incentive effects of taxation
  • income inequality

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