American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Efficiency Criteria, Income Taxation, and Heterogeneous Elasticities
American Economic Review
(pp. 1876–1913)
Abstract
A common interpretation of Pareto-efficient policies is that, for some cardinal utility representations of preferences, they maximize utilitarian welfare. We show in the context of income taxation that such cardinalizations are often extreme, requiring unbounded curvature of utility with respect to consumption. Taxes can be justified as utilitarian without these extreme cardinalizations if and only if revenues are decreasing and concave in a class of narrowly targeted tax cuts. We reformulate this condition as a sufficient-statistics test. The test fails whenever elasticities of taxable income are too heterogeneous within some income level, as we argue is empirically likely.Citation
Becko, John Sturm, and André Sztutman. 2026. "Efficiency Criteria, Income Taxation, and Heterogeneous Elasticities." American Economic Review 116 (5): 1876–1913. DOI: 10.1257/aer.20240919Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- J22 Time Allocation and Labor Supply
- J31 Wage Level and Structure; Wage Differentials