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Nontaxable income and necessary consumption: the Rousseau’s paradox of fiscal egalitarianism

Faíña, Andres / A. and Lopez-Rodriguez, Jesus / J. and Varela, Laura / L. (2011): Nontaxable income and necessary consumption: the Rousseau’s paradox of fiscal egalitarianism.

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Abstract

The traditional concept of a strict minimum of necessary consumption and nontaxable income equal for all taxpayers embedded in most current income-tax systems is the result of a paradox of fiscal egalitarianism. The paper shows that substituting the traditional notion of a strict minimum of nontaxable income (Surplus Income Tax Method) for a scheme of growing personal allowances to meet the amounts of necessary consumption required by the different living standards of the taxpayers (Discretionary Income Tax Method) generates an income-tax scheme more progressive than the traditional one. In the paper we also show that this alternative proposal for nontaxable incomes generates an after-tax income distribution less unequal (Lorenz dominance) and superior in terms of social welfare (Atkinson, 1970).

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