A comparison of optimal tax policies when compensation or responsibility matter

Abstract

This paper examines optimal redistribution in a model with high and low-skilled individuals with heterogeneous tastes for labor, that either work or not. With such double heterogeneity, it is well known that traditional Utilitarian and Welfarist criteria suffer serious flaws. As a response, several other criteria have been proposed in the literature. We compare the extent to which optimal policies based on different normative criteria obey the principles of compensation (for differential skills) and responsibility (for preferences for labor). Unsurprisingly, the criteria from the social choice literature perform better in this regard than the traditional criteria, both in first and second best. More importantly, these equality of opportunity criteria push the second best policy away from an Earned Income Tax Credit and in the direction of a Negative Income tax.