DP14853 Pareto-improving tax reforms and the Earned Income Tax Credit
|Author(s):||Felix Bierbrauer, Pierre Boyer, Emanuel Hansen|
|Publication Date:||June 2020|
|Keyword(s):||Earned Income Tax Credit, Non-linear income taxation, optimal taxation, Tax Reforms|
|JEL(s):||C72, D72, D82, H21|
|Programme Areas:||Public Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14853|
This paper provides necessary and suffcient conditions for the existence of Pareto-improving tax reforms. The conditions can be expressed as suffcient statistics and have a wide range of potential applications in public finance. We discuss one such application in detail: the introduction of the Earned Income Tax Credit (EITC) in the US. We find that the EITC can be viewed as a response to an inefficiency in the tax and transfer system prevailing at the time. This adds a new perspective to the literature on why the EITC is a good idea, emphasizing Pareto improvements rather than equity-efficiency trade-offs.