Inequality Reducing Properties of Income Tax Schedules

In a classic result, Jakobsson (1976) and Fellman (1976) showed that average-rate progressive, and only average-rate progressive, income taxes reduce income inequality. Carbonell-Nicolau and Llavador (2018) extended this result to the case of endogenous income, showing that marginal-rate progressivity — in the sense of increasing marginal tax rates on income — is necessary for tax structures to be inequality reducing, and obtaining necessary and sufficient conditions on the social utility function under which progressive and only progressive taxes are inequality reducing. Building on Carbonell-Nicolau and Llavador (2018), this paper furnishes conditions on primitives under which various subclasses of progressive taxes are inequality reducing. The main results in Carbonell-Nicolau and Llavador (2018) are obtained as particular cases of the more general framework presented here. Restricting the set of taxes allows for larger classes of preferences consistent with inequality reducing income taxation. As an illustration of the results’ practical implications, we provide a precise characterization of the subclass of (2018) taxes that are inequality reducing for some standard families of preferences.