Abstract
A prominent assumption in modern optimal tax research is that the objective of taxation is Utilitarian. I present new survey evidence that most people reject this assumption's implications for several prominent features of tax policy, instead preferring tax policies based at least in part on a classic alternative objective: the principle of Equal Sacrifice. I generalize the standard model to accommodate this preference for a mixed objective, proposing a method by which to make disparate criteria commensurable while respecting Pareto efficiency. Then, I show that optimal policy in this generalized model, calibrated to the survey evidence and U.S. microdata, is capable of quantitatively matching several features of existing tax policy that are incompatible in the conventional model but widely endorsed in the survey and reality, including the coexistence of substantial redistribution and limited tagging. Together, these findings demonstrate the potential of a positive theory of optimal taxation.
Highlights
Modern tax theorists have a workhorse model
The third contribution of this paper is to show that this generalized model, when calibrated to this survey evidence, can reconcile a number of features of tax policy that are incompatible in conventional theory but endorsed in the survey evidence as well as in reality
The survey results, theoretical analysis, and calibrated simulations of this paper demonstrate the potential of a positive optimal taxation research agenda
Summary
Created by Mirrlees (1971) more than four decades ago, that model has been used to study countless aspects of tax policy It provides the benchmark guidelines against which policy proposals are often judged, and its recommendations form the basis of prominent policy advice. When this standard model has been used to generate quantitative lessons for policy, theorists commonly have imposed a strong assumption: the objective of tax policy is Utilitarian, either in its simplest form as a sum of individual utilities or in a more general form as the sum of a concave transformation of individual utilities. To the extent that this assumption has been relaxed, it has usually been to allow for a more redistributive normative criterion, such as the Rawlsian priority on the least advantaged
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