Open AccessInequality reducing properties of progressive income tax schedules: The case of endogenous income
Author(s) -
CarbonellNicolau Oriol,
Llavador Humberto
Publication year - 2018
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te2533
Subject(s) - economics , progressive tax , gross income , labour economics , economic inequality , international taxation , income tax , inequality , normative , income distribution , state income tax , adjusted gross income , public economics , tax reform , mathematical analysis , philosophy , mathematics , epistemology
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.