| Abstract: |
The purpose of this paper is to introduce and adopt a generalised version of
Roemer's (1998) Equality of Opportunity (EOp) framework, which we call
extended EOp, for analysing second-best optimal income taxation. Unlike the
pure EOp criterion of Roemer (1998) the extended EOp criterion allows for
alternative weighting profiles in the treatment of income differentials
between and within types when types are defined by (observable) circumstances
that are beyond people's control. An empirical microeconometric model of
labour supply in Italy is used to simulate and identify income tax-transfer
rules that are optimal according to the extended EOp criterion. The
tax-transfer rules are only allowed to depend on income, i.e. we look for
second-best optimality. The rules are defined by a universal lump-sum transfer
(positive or negative) and by one or two marginal tax rates. A rather striking
result of the analysis is that the optimal tax-transfer rule turns out to be a
universal lump-sum tax (with marginal tax rates equal to zero), under Roemer's
pure EOp criterion as well as under the generalised EOp criterion with
moderate degrees of aversion to within-type inequality. A high degree of
withintype inequality aversion instead produces EOp-optimal rules with
positive marginal tax rates. When the EOp-version of the Gini welfare function
is adopted, the optimal tax rule turns out to be close to the actual 1993
Italian tax system, if not for the important difference of prescribing a
universal lumpsum positive transfer of 3,500,000 ITL, which has no comparable
counterpart in the actual system. On the other hand, when using the
conventional equality of outcome (EO) criterion, the pure lump-sum tax always
turns out to be optimal, at least with respect to the classes of two- and
three-parameter rules. We also compute optimal rules under the additional
constraint that universal lump-sum taxes are not feasible. Overall, the
results suggest, somehow surprisingly, that the extended EOp approach would
demand more redistribution than the EO approach. |