Optimal Income Taxes, Transfers and Inequality for an Atkinson-Based Social Welfare Function

The paper extends Atkinson’s measure of inequality to incorporate endogenous determination of incomes, with labour supplies responding to the tax system. On the basis of solutions for optimal income taxes using double limit analysis and derived from the social welfare function in this extension, the paper considers how the optimal income tax, transfers and inequality vary with the parameter used in the measure of inequality, and how taxation affects inequality. A measure of inequality is proposed that decomposes inequality into wage, labour supply, taxation and utility factors.