Designing an Empirically Based Just Linear Income Tax System

• Activity Number: 89
• Type: Contributed
• Date/Time: Sunday, August 4, 2013 : 4:00 PM to 5:50 PM
• Sponsor: Social Statistics Section
• Author(s): Guillermina Jasso*+ and Bernd Wegener
• Companies: New York University and Humboldt University
• Keywords: income tax ; fairness ; linear income tax

Abstract

This paper develops and illustrates a method for empirically designing an income tax system that people will regard as fair. We begin with the classical criteria for tax fairness, which state that as pre-tax income increases, so should post-tax income, the tax amount, and the tax rate, respectively. To choose among tax systems satisfying the three criteria, the method requires information on residents' pre-tax income and the post-tax income they regard as fair. These data enable estimation of the just tax system, including both the tax formula and the level of extraction/injection of resources. We illustrate the method using data from the German SocioEconomic Panel of 2009 - the only data which provide the two requisite variables. We estimate just linear tax systems, leaving to future work estimation of nonlinear tax systems. The paper reports and illustrates several analytic results, including conditions which threaten fairness - such as high deficit spending or oil revenues. The paper also shows that the estimated tax system lowers taxes for a majority of German respondents and substantially reduces inequality.