Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 17: Optimal Utilitarian Taxation and Horizontal Equity

Henrik Jordahl and Luca Micheletto ()
Additional contact information
Henrik Jordahl: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden, and, The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Luca Micheletto: L. Bocconi University, Postal: Milano, Italy

Abstract: We impose a horizontal equity restriction on the problem of finding the optimal utilitarian tax mix. The horizontal equity constraint requires that individuals with the same ability have to pay the same amount of taxes regardless of their preferences for leisure. Contrary to normal findings, we find that a good that is complementary to leisure need not be discouraged by the tax system, and that a good that normally should be discouraged by the tax system need not be taxed at a positive rate even if the economy is composed of only two private commodities plus leisure. Similarly, the marginal effective tax rate need not be equal to zero at the top when the tax mix obeys the horizontal equity constraint.

Keywords: horizontal equity; optimal taxation; heterogeneous preferences; utilitarianism

JEL-codes: D63; H21; H24

48 pages, December 30, 2002

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