piecewise linear tax functions progressivity and the principle of equal sacrifice abstract in this paper we discuss and criticise the conclusion asserted by mitra and ok mitra t ok e 1996 personal income taxation and the principle of equal sacrifice revisited international economic review 37 925 948 that when we restrict our attention to piecewise linear tax functions the principle of equal sacrifice implies progressivity

financial intermediation with risk aversion the paper extends diamond s 1984 analysis of financial intermediation to allow for risk aversion of the intermediary it shows that as in the case of risk neutrality the agency costs of external funds provided to an intermediary are relatively small if the intermediary is financing many entrepreneurs with stochastically independent returns even though the intermediary is adding rather than subdividing risks the underlying large numbers argument is not invalidated by the presence of risk aversion with risk aversion of entrepreneurs as well as the intermediary financial intermediation provides insurance as well as finance in contrast to earlier results on optimal intermediation policies under risk neutrality the paper shows that when an intermediary is financing many entrepreneurs with stochastically independent returns optimal intermediation policies must shift return risks away from risk averse entrepreneurs and impose them on the intermediary or on final investors

inequality aversion and the natural rate of subjective inequality abstract this paper analyzes inequality aversion across countries and identifies factors which explain the empirical heterogeneity observed across these countries we do this by hypothesizing a natural rate of subjective inequality across countries and solving for the explicit country specific value of the inequality aversion parameter that is consistent with the hypothesized natural rate we present evidence consistent with the existence of a natural rate of subjective inequality by verifying that countries with low high tolerance for inequality have low high inequality as measured by the gini coefficient as well finally we explore the socio economic factors that are consistent with observed differences in inequality aversion across these countries finding important effects of female empowerment public education expenditures per capita income economic growth and population size

adding risks samuelson s fallacy of large numbers revisited samuelson called accepting a sequence of independent positive mean bets that are individually unacceptable a fallacy of large numbers and subsequent researchers have extended samueison s condition on utility functions to assure that they would not allow this fallacy by contrast some behavioralists arguing the merits of diversification believe that it is simply wrong headed to refuse a long series of independent good bets out of a misguided faith in expected utility theory contrary to what one might infer from the literature this paper shows that accepting sequences of good bets is both consistent with expected utility theory and quite usual

on the equitability of progressive taxation abstract we propose the principle of equal sacrifice to determine the class of vertically inequitable progressive taxes a necessary condition for an income tax function to be equal sacrifice is formulated and hence a subclass of progressive taxes which cannot inflict the same sacrifice upon all individuals relative toanystrictly increasing and concave utility function is determined conversely it is shown in a general framework that any convex thus progressive tax function satisfies the principle of equal sacrifice our findings point to the fact that equal sacrifice under progressive income taxation depends heavily upon the degree of marginal rate as opposed to average rate progressivity journal of economic literatureclassification numbers d63 h20

on the principle of equal sacrifice in income taxation abstract in an influential article by young journal of economic theory 1988 44 321 335 it is shown that the traditional equal sacrifice principles in taxation can be justified from a non utilitarian perspective by proving that equal sacrifice is in fact a consequence of more primitive concepts of distributive justice this result is obtained in a distribution theoretic setting where total revenue to be raised is fixed the present paper studies the same question in a setting where the basic problem is to determine a tax function without any reference to the total tax revenue a setting which is familiar from the theory of progressive taxation and shows that i there exists a utility function which is continuous and strictly increasing relative to which all agents sacrifice equally if and only if the tax function is incentive preserving and ii any convex hence progressive and incentive preserving tax function equalizes sacrifice relative to a utility function which is continuous strictly increasing and concave

is there a demand for income tax progressivity recently marhuenda and ortuno ortin economics letters 48 1995 319 have provided a popular support for progressivity theorem that says that a marginal progressive tax always defeats a marginal regressive tax as long as individuals vote for the tax scheme minimizing their tax liabilities and the median income is less than the mean income in this paper we provide under similar circumstances a popular support for regressivity theorem according to which for any existing tax scheme there is always a majority support for a regressive reform reducing marginal progressivity or increasing marginal regressivity this regressive reform is supported by both extremes of the income distribution combining this result with marhuenda and ortuno ortin s result implies that vote cycling between regressive and progressive tax reform is inevitable and thus that the demand for progressivity cannot be established in the standard downsian framework with self interested voters

rational escalation of costs by playing a sequence of unfavorable gambles the martingale playing the martingale strategy is an anomaly reverse to that observed in the st petersburg paradox this paper rationalizes the demonstrated irrationality of playing by characterizing necessary and sufficient conditions under which a utility maximizing decision maker would play the strategy an individual willing to play the martingale may not be deterred by a finite cap on wagers individuals will continue with the strategy in the face of mounting consecutive losses which is thus sequentially rational these results give insight into instances of escalating commitment to a losing cause by analyzing one specific instance of such behavior

priority rules and other asymmetric rationing methods in a rationing problem each agent demands a quantity of a certain commodity and the available resources fall short of total demand a rationing method solves this problem at every level of resources and individual demands we impose three axioms consistency with respect to variations of the set of agents upper composition and lower composition with respect to variations of the available resources in the model where the commodity comes in indivisible units the three axioms characterize the family of priority rules where individual demands are met lexicographically according to an exogeneous ordering of the agents in the more familiar model where the commodity is divisible these three axioms plus scale invariance independence of the measurement unit characterize a rich family of methods it contains exactly three symmetric methods giving equal shares to equal demands these are the familiar proportional uniform gains and uniform losses methods the asymmetric methods in the family partition the agents into priority classes within each class they use either the proportional method or a weighted version of the uniform gains or uniform losses methods

the income lever and the allocation of aid the paper develops a concept and a measure of the monetary capacity of a country to reduce its own poverty and shows how these tools can be used to guide budget allocations or the allocation of aid the authors call this concept the income lever making use of tax and distributive theory the paper shows how different redistributive criteria correspond to the different normative criteria of the income lever it then constructs various income lever indexes based on these criteria and uses such indexes to rank countries according to their own capacity to reduce poverty as shown in the empirical application this methodology can provide an equitable tool to rank countries or regions when it comes to budget or aid allocations whether it is the allocation of social funds within the european union north north transfers or the allocation of aid from rich to poor countries north south transfers the findings indicate that the allocation of social funds in the european union follows closely the rank that results from the income lever indexes proposed while the allocation of aid to sub saharan african countries does not

marginal income tax rates in the united states a non parametric approach abstract the objective of this paper is to estimate both the u s federal marginal income tax rate and the state and local marginal income tax rates we use the non parametric regression method and data on income and tax extracted from u s individual tax model files for the period 1985 1995 the flexibility of the non parametric approach and the information at the individual level enable us to construct a more reliable time series of the average federal marginal income tax rates and that of the average state and local marginal income tax rates our results suggest that the average federal marginal income tax rate varies from 18 2 to 21 8 and the average state and local marginal income tax rate varies from 4 7 to 5 6 we also find that the state and local income tax accounts for roughly 18 of the total income taxes paid during 1985 1995 moreover our analysis shows that stephenson journal of monetary economics 41 1998 pp 389 409 provides the most consistent tax rate series for use in applications that require estimates of tax rates for years prior to 1985

personal income tax reforms a genetic algorithm approach given a settled reduction in the present level of tax revenue and by exploring a very large combinatorial space of tax structures in this paper we employ a genetic algorithm in order to determine the best structure of a real world personal income tax that allows for the maximisation of the redistributive effect of the tax while preventing all taxpayers being worse off than with the present tax structure we take italy as a case study

the value of tax progressivity evidence from survey experiments abstract the aim of this paper is to investigate how people value tax progressivity more precisely i study the potential trade off between any improvement in the final income distribution and the progressivity of the tax schedule to do this i designed survey experiments in which respondents were asked to rank or to choose between different taxation redistribution schemes with different treatments varying in terms of information availability 1 when only information about final incomes is provided and 2 when information about average tax rates is also available using a within subject design the instability of rankings between 1 and 2 indicates whether or not respondents value tax progressivity i find that information about tax rates significantly affects respondents judgments about tax schemes they exhibit a strong preference for tax progressivity i e they accept a fall in the quality of the final income distribution in exchange for progressive taxation the results of an additional treatment suggest that the mere fact of providing new information cannot account for this finding

bequest behavior and the effect of heirs earnings testing the altruistic model of bequests that parents transfer resources to children because of altruistic concern is a reasonable a priori assumption however economic theories of altruistic transfers have produced many counterintuitive conclusions and consequently much debate when applied to bequests these theories predict that inheritances will compensate for earnings differences between siblings as well as between parents and children this paper tests these implications using a new data set centered on federal estate tax returns little support can be found for an altruistic theory of bequests this finding has implications for macroeconomic policy government transfer programs and inequality copyright 1996 by american economic association

making the transition to prepaid medicare the medicare system is facing a financial crisis brought on by a combination of factors 1 a financing system that relies on intergenerational transfers from workers to the elderly as its major source of revenue 2 a payment scheme that traditionally has provided neither the demand nor the supply side of the market with strong incentives to hold down costs and 3 the penchant of congress to expand the coverage of the system over time every time a worthy cause or group can be identified the expansion of medicare benefits began almost immediately after the passage of the legislation in 1967 just one year after medicare had passed congress increased the number of days of in patient hospital care covered by the program in 1972 payment for the services of interns and residents in podiatry training was added to the benefit package also medicare coverage was extended to disabled persons under age 65 who were eligible for benefits under social security or railroad retirement and to certain other individuals under age 65 suffering end stage renal disease later medicare benefits were extended to state and local government employees not covered by social security and then coverage was extended to spouses of workers who were not yet covered but would be eligible to be covered in 1980 unlimited home health visits were covered as was the use of alcohol detoxification facilities in 1985 medicare provided payment for liver transplant services 1 there is current political pressure to

equal sacrifice and incentive compatible income taxation abstract the concepts of equal sacrifice and incentive compatibility in income taxation have been of interest to economists for some time here we attempt to integrate the two literatures in a model that offers a labor leisure choice to consumers while imposing an equal relative or absolute sacrifice tax system the main result is that equal sacrifice incentive compatible income tax systems generally exist and are locally unique examples are presented where this tax system is easy to compute comparative statics are calculated finally some remarks about the welfare properties of these tax systems are made

on indeterminacy and growth under progressive taxation and productive government spending we examine the theoretical interrelations between equilibrium in determinacy and economic growth in a one sector representative agent model of endogenous growth with progressive taxation of income and productive flow of public spending we analytically show that if the demand side effect of government purchases is weaker the economy exhibits an indeterminate balanced growth equilibrium and belief driven growth fluctuations when the tax schedule is sufficiently progressive or regressive if the supply side effect of public expenditures is weaker indeterminacy and sunspots arise under progressive income taxation in sharp contrast to traditional keynesian type stabilization policies our analysis finds that raising the tax progressivity may destabilize an endogenously growing economy with fluctuations driven by agents self fulfilling expectations sur l indetermination et la croissance quand la fiscalite est progressive et les depenses gouvernementales productives on examine les interrelations theoriques entre l in determination de l equilibre et la croissance economique dans un modele de croissance endogene un secteur agent representatif quand la fiscalite sur le revenu est progressive et le flux de depenses publiques productif on montre analytiquement que si l effet du cote de la demande des achats gouvernementaux est relativement plus faible cela se traduit par un equilibre de croissance balancee indeterminee et des fluctuations de la croissance alimentees par les croyances quand la cedule de taxation est suffisamment progressive ou regressive si l effet du cote de l offre des depenses publiques est relativement plus faible l indetermination et les fluctuations emergent quand la fiscalite sur le revenu est progressive contrairement aux analyses traditionnelles de type keynesien des politiques de stabilisation ces analyses montrent qu augmenter la progresssivite de la fiscalite peut destabiliser une economie avec croissance endogene quand les fluctuations sont alimentees par les anticipations auto realisees des agents canadian economics association

distributive justice in taxation abstract a classical criterion for apportioning taxes is that all should sacrifice equally in loss of utility suppose that a method of apportioning taxes is continuous and has the following four properties i the way that taxpayers split a given tax total depends only on their own taxable incomes ii an increase in the tax total implies that everyone pays more iii every incremental increase in tax is apportioned according to taxpayers current after tax incomes iv the ordering of taxpayers by pre tax income and after tax income is the same then there exists a utility function relative to which all sacrifice equally

on the efficiency of equal sacrifice income tax schedules abstract in an economy which primitives are exactly those in mirrlees 1971 we investigate the efficiency of tax schedules derived under the equal sacrifice principle for a given exogenous government consumption level we assess whether there is an alternative tax schedule that raises more revenue while delivering less utility to no one for our preferred parametrizations we find that inefficiency only arises at the top of the income distribution for marginal tax rates well above the ones we currently observe in most countries we also recover the implicit marginal social weights associated with the equal sacrifice schedule and find them not to be monotonic in types for the environments we study

the demand for episodes of treatment in the health insurance experiment abstract this paper analyzes claims data from the rand health insurance experiment which were grouped into episodes of treatment the insurance plans in the experiment have coinsurance and a cap on out of pocket spending using new statistical techniques to adjust for the increased sickliness of those who exceed the cap the effects of coinsurance on cost per episode and number of episodes are estimated cost sharing reduced the number of episodes but had little effect on cost per episode people in the experiment responded myopically as their current insurance status changed through the year the price elasticity of spending was about 0 2 throughout the range of coinsurance studied when data permit it the study of episodes complements analyses of annual medical spending by revealing more about how decisions to spend are made within the year

the politics of progressive income taxation with incentive effects this paper studies majority voting over quadratic taxation and investigates under which conditions marginal progressivity emerges as a voting outcome in our model with endogenous income there is no majority condorcet winning tax schedule we then investigate less demanding political equilibrium concepts in order to see under which conditions the set of equilibria is composed only of progressive tax functions we follow three strategies i reduction of the policy space to the tax functions that are ideal for some voter ii elimination of weakly dominated strategies and the use of mixed strategies in a standard downsian two party competition game iii assumption that political parties interact repeatedly and care about the size of their majority although each approach captures a different aspect of political behavior they point to the same simulation based conclusion that progressivity is more likely to emerge for most distributions of abilities and that it is actually the only possible voting outcome if the distribution is sufficiently concentrated at the middle

diversity and economic performance in a model with progressive taxation is a more heterogeneous population beneficial or harmful to long term economic performance this paper addresses this and other questions in a dynamic general equilibrium model where consumers have different labour productivity and time preference we show how differences in the cross sectional distribution of these characteristics can affect the economy via two channels the first one involves changing the composition of the labour force and the second one involves changing the cross sectional distribution of marginal tax rate we show how these channels are respectively determined by the shape of the labour supply function and the curvature of the marginal tax function

attractive compounds of unattractive investments and gambles a compound of many independent replicas of an investment or gamble may be attractive to some risk averters who do not accept the individual investment or gamble this can happen if there is a chance that the compound leads to a wealth level where the degree of risk aversion is lower than at the initial wealth level it can also happen if the investor has some sort of limited liability the von neumann morgenstern utility functions with the property that sufficiently long sequences of repetitions of any fair gamble are preferred to all finite wealth levels are characterized in this paper

redistributive effects of minimal equal sacrifice taxation we examine the circumstances under which minimal equal sacrifice taxation reduces income inequality focusing on absolute sacrifice and relative inequality we show that after tax incomes are more equally distributed than before tax incomes and that after tax inequality decreases with the revenue to be raised if and only if the elasticity of the marginal utility of income is decreasing however other things equal after tax inequality is shown to decline as the utility function becomes more concave we investigate next how these conclusions extend when one takes the absolute inequality view and considers that it is the relative loss in utility that has to be equalized across individuals

parental altruism and inter vivos transfers theory and evidence this paper uses psid data on the extended family to test whether inter vivos transfers from parents to children are motivated by altruism specifically the paper tests whether an increase by one dollar in the income of parents actively making transfers to a child coupled with a one dollar reduction in that child s income results in the parents increasing their transfer to the child by one dollar this restriction on parental and child transfer income derivatives is derived for the standard altruism model augmented to include uncertainty and liquidity constraints these additional elements pin down the timing of inter vivos transfers the method used to estimate income transfer derivatives takes into account unobserved heterogeneity across families in the degree of altruism the findings strongly reject the altruism hypothesis redistributing one dollar from a recipient child to donor parents leads to less than a 13 cent increase in the parents transfer to the child far less than the one dollar increas

a multivariate analysis of the distribution of individual s welfare in china what is the role of health many economists have argued that income is an inadequate indicator of welfare in this paper we conduct a multivariate analysis of the distribution of individual welfare in china at three selected time points 1991 1997 and 2006 instead of using income as the only welfare indicator as in most distributional analyses we explicitly consider the role of health in welfare distribution we adopt the naga and geoffard 2006 decomposition method by which we can decompose a bidimensional welfare inequality index into two univariate atkinson kolm sen indices that measure the inequalities in health and income and a third term that measures the contribution from the joint distribution of the two attributes to total inequality we show that the third term might be used as an alternative to the concentration index to measure the income related inequality in health

the effects of differential mortality rates on the progressivity of social security does the old age and survivors insurance portion of social security become regressive once we allow for the shorter lifespan of poor people this paper compares the net returns of poor households to the net returns of other households after taking into account differential longevity earnings and social security tax and benefit histories are simulated for u s families of various income levels in the 1925 birth cohort these tax and benefit profiles are then weighted by the agents probabilities of survival for some plausible values of key mortality parameters differences in mortality eliminate the progressive spread in returns across income categories excerpt

all roads lead to risk preference a turnpike theorem for conditionally independent returns an individual is repeatedly offered the opportunity to invest in a risky asset whose retum distribution is unknown because the return distribution is constant over time however he is able to learn about that distribution by observing investment outcomes results are presented regarding the asymptotically optimal investment behavior of a risk averse indi vidual under these circumstances when his aim is to maximize the expected utility of his end of horizon wealth for the class of isoelastic utility functions with constant relative risk averson less than one the optimal investment approaches a constant proportion of wealth the limiting proportion is the same as the proportion put up by the most optimistic individual when the investment opportunity is offered only once these results are then extended by generalizing the class of utility functions under consideration and at the same time restricting the class of possible investment schemes this paper is distinguished from the previous literature by the assumption of conditional independence of returns across periods