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RESEARCH PRODUCT

Income Equality and Income Taxation

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In every society the distribution of income plays an essential role — not only for economists but also for social scientists and politicians. Most people agree that the laissez-faire allo-cation is not equitable but that some redistribution using taxes has to take place. Most of the literature has supposed that a Bergson- Samuelson social welfare function is the appropriate tool for capturing social values in such analyses. However, there are some objections against this approach. First, interpersonal comparability of the individual utilities is needed — an extremely strong and questionable claim. Second, most writers have worked with a concave transformation of individual cardinal utilities. But then, as Stern (1976, pp. 125) writes “the specification of a particular cardinal numbering for individuals and the form of the social preference relation over utilities may well be difficult, if not impossible, to disentangle… .” Third, Sadka (1976) has shown that the marginal tax rate at the top (for the richest) is zero if we use social welfare functions of the Bergson-type. Many people will not accept this result even after they have understood why it is valid.