Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/287983 
Year of Publication: 
2023
Citation: 
[Journal:] Econometrica [ISSN:] 1468-0262 [Volume:] 91 [Issue:] 3 [Publisher:] Wiley [Place:] Hoboken, NJ [Year:] 2023 [Pages:] 1077-1103
Publisher: 
Wiley, Hoboken, NJ
Abstract: 
We develop a new approach for the identification of Pareto‐improving tax reforms. This approach yields necessary and sufficient conditions for the existence of Pareto‐improving reform directions. A main insight is that “Two brackets are enough”: When the system cannot be improved by altering tax rates in one or two income brackets, then there is no continuous reform direction that is Pareto‐improving. We also show how to check whether a given tax reform is Pareto‐improving. We use these tools to study the introduction of the Earned Income Tax Credit (EITC) in the United States in 1975. A robust finding is that, prior to the EITC, the U.S. tax‐transfer system was not Pareto‐efficient. Under plausible assumptions about behavioral responses, the 1975 reform was not Pareto‐improving. Qualitatively, though, it had the right properties: A similar reform with earnings subsidies made available to a broader range of incomes would have been Pareto‐improving.
Subjects: 
Tax reforms
non‐linear income taxation
optimal taxation
earned income tax credits
Pareto efficiency
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article
Document Version: 
Published Version

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