Reinterpreting the Frisch Parameter in the Field of Personal Taxation: a Link between Taxable Capacity and Social Marginal Utility in Optimal Taxation

A non-existent meaning in the field of personal taxation is given to the Frisch parameter. Using an Indirect Addilog System, we formulate a relationship between Frisch parameter and the discretionary income based on the different degree of urgency or priority of needs routed in the values of households’ consumption. As result, the concept of tax capacity can be interpreted in terms of utility, redefining and conciliating the approaches of taxable capacity and social welfare. Keywords: Frisch parameter, taxable capacity, social marginal utility, Optimal taxation, Carter Report, Meade Report JEL Classification: D63; H21; H24 1. Introduction Measuring tax capacity has always been a challenge in personal taxation. The proposals arising from the Carter (1975) and Meade (1978) reports center around this concept that has its limitations in terms of definition and empirical implementation. In words of the Meade Report (1978, p.14): ‘On examination, “taxable capacity” always turns out to be very difficult to define and to be a matter on which opinions will differ rather widely.’ Based on the aforementioned problems, over the last decades Optimal Taxation Theory (hereafter, OTT) (Mirrlees, 1971) and the so-called Dynamic OTT (Acemoglu et al., 2010, Golosov et al. 2011) have become the predominant strands in the literature of taxation. However, this theory is also lacking a fully objective nature since it is based on the use of utilitarian social welfare functions. According to Kay (2008, p.660):‘if one is to maximize a social welfare function based on an aggregation of individual circumstances, it is necessary to envisage some agreement on what the individual 







































 



















 
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