Pareto-Improving Tax Reforms and the Earned Income Tax Credit

• 成果类型: Article
• 署名作者: Bierbrauer, Felix J. J.; Boyer, Pierre C. C.; Hansen, Emanuel
• 署名单位: University of Cologne; Institut Polytechnique de Paris; Ecole Polytechnique; ENSAE Paris; University of Munich
• 刊物名称: ECONOMETRICA
• ISSN/ISSBN: 0012-9682
• DOI: 10.3982/ECTA18600
• 发表日期: 2023
• 页码: 1077-1103
• 关键词: social preferences; 1st-order approach; taxation; welfare; selection; implicit; mothers

摘要

We develop a new approach for the identification of Pareto-improving tax reforms. This approach yields necessary and sufficient conditions for the existence of Pareto-improving reform directions. A main insight is that Two brackets are enough: When the system cannot be improved by altering tax rates in one or two income brackets, then there is no continuous reform direction that is Pareto-improving. We also show how to check whether a given tax reform is Pareto-improving. We use these tools to study the introduction of the Earned Income Tax Credit (EITC) in the United States in 1975. A robust finding is that, prior to the EITC, the U.S. tax-transfer system was not Pareto-efficient. Under plausible assumptions about behavioral responses, the 1975 reform was not Pareto-improving. Qualitatively, though, it had the right properties: A similar reform with earnings subsidies made available to a broader range of incomes would have been Pareto-improving.