Generalized Social Welfare Weights for Optimal Tax Theory

Citation:

Saez, Emmanuel, and Stefanie Stantcheva. 2016. “Generalized Social Welfare Weights for Optimal Tax Theory.” American Economic Review 106 (1): 24-45.
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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.

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Last updated on 12/22/2018