Optimal Income Taxation: An Ordinal Approach

In a model where agents have unequal production skills and di erent preferences, we build social welfare functions which rely only on ordinal non-comparable information on individual preferences. Social welfare functions are required to satisfy properties of compensation for inequalities in skills, and responsibility for preferences. Then, assuming skills and preferences are unobservable, we use these social welfare functions to design optimal income tax schemes. We obtain ethical foundations for, among others, a maximized minimal income, a zero marginal tax rate for low incomes, and increasing marginal tax rates. We thank L. Gevers for stimulating conversations, L. Kranich for valuable comments on an earlier draft, J. L. Prigent for technical advice, and participants at seminars in Aix, CORE, Leuven, Montreal, Namur and Paris, and at conferences in Manresa (May 1997), Cergy (June 1997), Toulouse (Aug. 1997), Quimper (June 1998), Tuscaloosa (May 1998) and Vancouver (July 1998) for their comments. Financial support from EC contract FMRX-CT96-0055 is gratefully acknowledged. THEMA, Universit e de Cergy-Pontoise. FNRS, Facult es Universitaires Notre-Dame de la Paix{Namur, and CORE.