Working Paper: CEPR ID: DP14853
Authors: Felix Bierbrauer; Pierre Boyer; Emanuel Hansen
Abstract: This paper provides necessary and suffcient conditions for the existence of Pareto-improving tax reforms. The conditions can be expressed as suffcient statistics and have a wide range of potential applications in public finance. We discuss one such application in detail: the introduction of the Earned Income Tax Credit (EITC) in the US. We find that the EITC can be viewed as a response to an inefficiency in the tax and transfer system prevailing at the time. This adds a new perspective to the literature on why the EITC is a good idea, emphasizing Pareto improvements rather than equity-efficiency trade-offs.
Keywords: tax reforms; nonlinear income taxation; optimal taxation; earned income tax credit
JEL Codes: C72; D72; D82; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| EITC introduction (H26) | improved welfare outcomes (I38) |
| EITC introduction (H26) | pareto-improving reform (D78) |
| inefficiency in tax and transfer system (H21) | EITC introduction (H26) |
| EITC introduction (H26) | no losers in reform process (P41) |
| high marginal tax rates (H31) | inefficiency in tax and transfer system (H21) |
| EITC introduction (H26) | further improvements possible through two-bracket reforms (H21) |