Preference Determinants of Inequality Reducing Income Taxation

Abstract

The link between income inequality and progressive taxation has long been considered a fundamental normative foundation for income tax progressivity. This paper furnishes necessary and sufficient conditions on primitives under which various subclasses of progressive taxes are inequality reducing. The results are a strict generalization of those in Carbonell-Nicolau and Llavador (2018), and confer a degree of useful flexibility on the theory, in that it allows the analyst to expand the universe of consumer preferences by suitably restricting the set of marginal-rate progressive taxes. As an illustration of the result’s practical implications, we provide a precise characterization of the subclass of (progressive) taxes that are inequality reducing for the CES and the quasi-linear utility functions. These families of preferences are pervasive in surveys and textbooks on labor supply and fiscal policy.