Efficiency Criteria, Income Taxation, and Heterogeneous Elasticities
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. (JEL D81, H21, H23, H24, J22, J31)
Fields of Study & Subjects
Fiscal Policy and Economic Growth
Economic Policies and Impacts
Politics
Economics
and Education Policy
Publication details
- Journal / source
- American Economic Review
- Publisher
- American Economic Association
- Volume
- 116
- Issue
- 5
- Pages
- 1876–1913
- Publication date
- 30 April 2026
- Language
- EN