Optimal Progressivity

To this point, we have assumed that all individuals are the same. To consider the distributional impact of the tax system, we will have to alter that assumption. We have seen that di¤erential lump sum transfers can move the economy along the Pareto frontier. However, the fact that a point like A (Figure 11) is Pareto e¢ cient does not necessarily imply that it is better than point B. As Samuelson said, "E¢ ciency has no normative implications." The question of how far the government should go in moving toward total equality, represented by the 45 line in Figure 11, cannot be answered by an analysis based purely on e¢ ciency. In fact, there are several reasons that the government might not choose to redistribute income at all. The issue is divisive because the government must take income from some in order to give it to others. The economic cost might even be so high that redistribution is not indicated in practical terms, even if it is preferred in theory.