Redistributive effects of minimal equal sacrifice taxation

Focusing on absolute sacrifice and relative inequality, it is shown that after tax incomes are more equally distributed than before tax incomes and that afterTax inequality decreases with the revenue to be raised if and only if the elasticity of the marginal utility of income is decreasing.

Abstract

We examine the circumstances under which minimal equal sacrifice taxation reduces income inequality. Focusing on absolute sacrifice and relative inequality, we show that after tax incomes are more equally distributed than before tax incomes and that after tax inequality decreases with the revenue to be raised if and only if the elasticity of the marginal utility of income is decreasing. However, other things equal, after tax inequality is shown to decline as the utility function becomes more concave. We investigate next how these conclusions extend when one takes the absolute inequality view and considers that it is the relative loss in utility that has to be equalized across individuals.