Optimal personal income taxation: What do we know about the relationship between redistribution and efficiency costs?

Alejandro Esteller Moré

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Published: May 29, 2023
Abstract

Optimal taxation theory offers recommendations on the design of a non-linear income tax that, while minimizing efficiency costs, maximizes redistribution. To make such recommendations operational, it is necessary to know the taxpayers' response elasticity to increases in the marginal tax rate, which together with the shape of the labor income distribution and social preferences for redistribution end up determining the optimal design of the tax. Economic theory and the estimators provided in the literature, therefore, provide the social decision maker with powerful instruments to guide the tax design. This is what is reviewed in this panoramic article.

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Keywords:
utilitarian approach, optimal taxation, elasticity of taxable income
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