Normative Judgments Implicit in the Tax System: A Simulation Approach

Niklas Isaak () and Robin Jessen ()
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Niklas Isaak: RWI
Robin Jessen: RWI

No 17566, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: How much does society value redistribution? The common method to derive inverse-optimum welfare weights is by inverting an optimal-tax model. Our alternative imposes fewer restrictions on labor supply and enables comparisons across household types. We use a structural labor supply model to calculate the marginal value of public funds for various small tax reductions, directly linked to welfare weights. An application to Germany finds: i) The tax-transfer system is optimal if society values one additional Euro for the bottom decile three times as much as for the median. ii) At low-medium incomes, weights for couples exceed those for singles substantially.

Keywords: inverse optimum; microsimulation; marginal value of public funds; social welfare function; optimal taxation; labor supply; efficiency (search for similar items in EconPapers)
JEL-codes: H21 H31 J22 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2024-12
New Economics Papers: this item is included in nep-cmp, nep-lma and nep-pbe
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