Brown Bag Seminar: François Maniquet, CORE

Preference Responsibility vs Poverty Reduction in the Taxation of Labor Incomes

François Maniquet, CORE

(Joint work with Lancelot Henry de Frahan, University of Chicago)

We study optimal labor income taxation when the objective of the planner combines the ethical values of Pareto efficiency, responsibility for one's preferences and poverty reduction. We capture the objective of poverty reduction by imposing that a transfer from an agent above the poverty line to another agent below the poverty line is a social improvement. We show that there are ways of defining such a requirement and make it compatible with Pareto efficiency and preferences responsibility. We characterize the way any social preferences satisfying the three requirements and separability should rank allocations in which some agents consume bundles in the neighborhood of the poverty line. Then, assuming that agents have quasi-linear preferences, and that there is only one dimension of behavioral heterogeneity, we derive the formula of the optimal labor income tax scheme and we calibrate the formula to the U.S. economy.