A Contribution to the Theory of Optimal Utilitarian Income Taxation

Hellwig, Martin F.

doi:10.2139/ssrn.869204

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A Contribution to the Theory of Optimal Utilitarian Income Taxation

MPI Collective Goods Preprint No. 2005/23

53 Pages Posted: 8 Dec 2005

See all articles by Martin F. Hellwig

Martin F. Hellwig

Max Planck Institute for Research on Collective Goods; University of Bonn - Department of Economics; European Corporate Governance Institute (ECGI)

There are 2 versions of this paper

Date Written: November 2005

Abstract

The paper provides a new proof of the positivity of the optimal marginal income tax, in a more general model, under weaker assumptions. The analysis focusses on the (weakly) relaxed problem in which upward incentive constraints are replaced by a monotonicity condition on consumption. Without upward incentive constraints, nonnegativity of the optimal marginal income tax is straightforward; strict positivity follows from an assumption on the desirability of redistributing leisure. The resulting allocation is incentive compatible, and is optimal for the original income tax problem. The argument is the same for distributions with finitely many types and for a continuous type distribution.

Note: An updated version of this paper can be found at: http://ssrn.com/abstract=968643

Keywords: Optimal Income Taxation, Utilitarian Welfare Maximization, Redistribution

JEL Classification: D63, H21

Suggested Citation: Suggested Citation

Hellwig, Martin F., A Contribution to the Theory of Optimal Utilitarian Income Taxation (November 2005). MPI Collective Goods Preprint No. 2005/23, Available at SSRN: https://ssrn.com/abstract=869204 or http://dx.doi.org/10.2139/ssrn.869204