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Mause I 274
Taxation/Stiglitz/Atkinson: Problem: every income tax has a similar effect to a selective consumption tax. You can now afford less of these goods with the same amount of work. The problem of substitution ((s) shifting demand to less taxed goods) also makes the supply of labour in the labour market less attractive (and more attractive to do nothing). The advantage of a non-linear income tax over a consumption tax, however, is that it enables a more direct and targeted redistribution that is desired for reasons of fairness.
Consumer tax/income tax: Atkinson and Stiglitz provide a theorem on their interaction (1):
Accordingly, a differentiated consumption tax cannot play a meaningful additional role in a benefit function in which leisure preferences and those for other consumer goods are poorly separable if a non-linear income tax already exists. The reason for this is the effect of a non-linear income tax in this class of models (see Mirrlees 1971 (2) and even younger models such as Saez 2002 (3)). The tax functions as a mechanism of self-selection, i.e. ideally it makes individuals with high productivity want to earn high incomes despite taxation, which can then be diverted and redistributed to such an extent that it is barely compatible with the condition of self-selection.
Problem: the self-selection ((s) here: Decision for proactivity) no longer works if the tax rate is too high. Then individuals can choose to reduce their own workload.
Solution: with not weakly separable benefit functions one could also influence taxpayers' leisure preferences by selecting the appropriate tax rates for consumer goods. Only in this case would it make sense to combine and coordinate the two systems.

1. Anthony B. Atkinson, und Joseph E. Stiglitz. 1976. The design of tax structure: Direct versus indirect taxation. Journal of Public Economics 6 (1): pp. 55– 75.
2. James Mirrlees, 1971. An exploration in the theory of optimal income taxation. Review of Economic Studies 38 (2) pp. 175– 208.
3. Emmanuel Saez 2002. Optimal income transfer programs: Intensive versus extensive labor supply responses. Quarterly Journal of Economics 117 (3) pp. 1039– 1073.

Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution.
The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.

EconAtkin I
Anthony B. Atkinson
Joseph E. Stiglitz
The design of tax structure: Direct versus indirect taxation 1976

Mause I
Karsten Mause
Christian Müller
Klaus Schubert,
Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018

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Ed. Martin Schulz, access date 2020-09-19
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