Working Paper: NBER ID: w18835
Authors: Emmanuel Saez; Stefanie Stantcheva
Abstract: This paper proposes a new way to evaluate tax reforms, by aggregating losses and gains of different individuals using “generalized social marginal welfare weights.” A tax system is optimal if no budget neutral small reform can increase the weighted sum of (money metric) gains and losses across individuals. Optimum tax formulas take the same form as standard welfarist tax formulas by simply substituting standard marginal social welfare weights with those generalized marginal social welfare weights. Weights directly capture society’s concerns for fairness allowing us to cleanly separate individual utilities from social weights. Suitable weights can help reconcile discrepancies between the welfarist approach and actual tax practice, as well as unify in an operational way the most prominent alternatives to utilitarianism such as Libertarianism, Equality of Opportunity, or Poverty alleviation.
Keywords: Optimal Tax Theory; Social Marginal Welfare Weights; Tax Reforms; Fairness; Equity
JEL Codes: H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax system characteristics (H20) | welfare outcomes (I38) |
| generalized social marginal welfare weights (D69) | evaluation of tax policies (H29) |
| fairness considerations (D63) | tax policy effectiveness (H26) |
| optimal tax formulas (H21) | societal values (A13) |