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School of Economics and Finance Seminar The equal-sacrifice social welfare function

Speaker: Dr Paolo Piacquadio, University of Oslo

Abstract: This paper enriches the toolbox of welfare criteria for the study of optimal redistributive policies. First, we revisit the equal sacrifice principle of taxation. Equality of sacrifice requires each tax-payer to contribute to the government budget by making the same sacrifice. However, labor-supply responses determine a conflict with Pareto efficiency. Addressing this issue, we axiomatically characterize Paretian welfare criteria that trade off equality of sacrifice with efficiency, named equal-sacrifice social welfare functions. Second, we generalize our results by characterizing a family of social welfare functions that bridges the gap between equal-sacrifice fairness and generalized utilitarianism. Third, we show our results extend to heterogeneous preferences and can be applied to various policy questions. We also illustrate our welfare criteria by simulating the optimal non-linear income tax for the US economy. Our equal-sacrifice social welfare function is less redistributive than traditional criteria, but—for progressive views of sacrifice—more redistributive than the US tax system.

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