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Lower tax for minimum wage earners

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Jin_EconDiscPap_1703.pdf (369.7Kb)
Date
02/2017
Author
FitzRoy, Felix
Jin, Jim
Keywords
Flat tax
Income redistribution
Maximin
Pareto improvement
HB Economic Theory
HG Finance
HF5601 Accounting
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Abstract
We show that minimum wage earners should pay a lower tax than high earners. Though intuitive, this idea is not supported by the existing literature. The optimal maximin tax curve and two-band taxes are usually decreasing. Since decreasing marginal taxes would be unpopular, by continuity a flat tax seems to be superior to increasing marginal taxes and should be a second best solution. However, using a simple utility function and a general income distribution, we find that lowering the marginal tax for minimum wage earners not only dominates the optimal flat tax under maximin, but also make everyone better off.
Citation
FitzRoy , F & Jin , J 2017 ' Lower tax for minimum wage earners ' School of Economics and Finance Discussion Paper , no. 1703 , University of St Andrews , St Andrews .
ISSN
0962-4031
Type
Working or discussion paper
Rights
Copyright (c) 2017, the authors
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  • University of St Andrews Research
URL
https://ideas.repec.org/p/san/wpecon/1703.html
URI
http://hdl.handle.net/10023/10362

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