Social Welfare, Redistribution, and the Tradeoff between Efficiency and Equity, with Developing Country Applications

The economic literature on “optimal income taxation” addresses the question of how to design tax and transfer policy so as to maximize “social welfare,” which is some function of the wellbeing of all members of society. It clarifies how the social-welfare-maximizing policy depends on one’s philosophy of distributive justice, and on empirical evidence about the behavioral response to incentives, and thus provides a systematic way of evaluating the tradeoff between equity and efficiency. Here, I explain the key insights of the optimal income taxation literature in a way that should be accessible to those with a familiarity with introductory economics, and then provide a brief introduction to some interesting pieces of evidence from around the world that are relevant to this question.