Income Taxes
Agnar Sandmo, Norwegian School of Economics, Bergen, Norway
Ó 2015 Elsevier Ltd. All rights reserved.
Abstract
Following a discussion of the nature of income taxation, the article reviews theory and evidence of the effects of the income
tax on individual behavior with respect to labor supply, saving, portfolio choice, and tax evasion. It also discusses the role of
the tax in income redistribution and the design of an optimal tax system that combines the concerns for economic efficiency
and distributive justice. It also reviews a number of recent proposals for tax reform in different countries.
In the eyes of the taxpayer, the income tax is the most visible
form of taxation and therefore also politically the most
controversial. Controversies surround the issues of how the
income tax affects individual behavior in areas such as labor
supply, saving, home production, and tax evasion. Even more
controversial, obviously, is the use of the income tax to redis-
tribute income, which raises the more normative question of
how progressive the income tax ought to be.
The Nature of Income Taxation
The income tax is the prime example of a direct tax; it is levied
directly on the incomes of the individual consumers in the
economy, and it can be designed to take account of the indi-
vidual circumstances of the taxpayer. In contrast, indirect taxes
are levied on anonymous market transactions and are paid at
the same rate irrespective of the taxpayer’s income, number of
children, age, health – to mention just a few of the taxpayer
characteristics that have over time been taken into account in
the design of the personal income tax. It is this tailoring of the
tax to the individual’s ability to pay, which makes it a poten-
tially important instrument for the redistribution of income
and for reducing differences in the standard of living among
individuals and families.
The definition of taxable income varies in the legal systems
of different countries and over time. Labor income – wages
and salaries – forms the central element of the tax base. To this
is added income from capital in the form of interest, divi-
dends, etc. However, income from capital is a more elusive
concept than income from labor. Thus, countries differ in the
extent to which capital gains are subject to taxation, and they
differ in the extent to which noncash income, such as the
imputed income from owner-occupied housing, is subject to
tax. Perhaps even more importantly, rules differ regarding the
deductibility of negative capital income, such as interest
payment on mortgage loans. Tax laws also differ in the extent
to which they allow the deduction of particular expenses, such
as the cost of travel to work, the cost of child care, trade union
fees, etc.
These differences in the tax base may reflect different
perceptions among policy makers of what is a just and fair tax
system; they may also reflect differences in the balance of
political power among various special interests. What is clear is
that different legal definitions of the tax base create different
744 International Encyclopedia of the Social & Behavioral Sciences, 2nd edition, Volume 11
economic incentives for the taxpayers as well as different
consequences for the after-tax distribution of income.
The income tax may be progressive, proportional, or
regressive. A proportional tax is one where the average tax rate
is constant; the proportion of income paid in tax is the same
for all levels of income. Note that this implies that the
marginal tax rate – the percentage tax paid out of a small
increase in income – is also constant. In a progressive tax
system the average tax rate increases with income, and this
implies that the marginal rate is higher than the average rate.
Finally, in a regressive tax system the average tax rate is
decreasing, with the marginal tax rate being lower than the
average rate.
Countries differ considerably both in their legal definitions
of the tax base and in the degree of progressivity of their income
tax schedules. There is also significant variation between
countries as regards the importance of taxes on income as
a source of revenue. To illustrate, in 2010 according to official
Organisation for Economic Co-operation and Development
statistics, the share of income taxes (as levied on all sources of
income and inclusive of social security taxes) in total tax
revenue varied from about 45% in Chile, Mexico, and Israel to
around 70% in countries like Norway, Switzerland, and the
United States. Of course, these percentage shares are reflected in
a correspondingly high share of revenue from indirect taxes in
the former group of countries and a low share in the latter.
The Income Tax and Economic Behavior:
Labor Supply
How do variations in the income tax rate affect the labor supply
of individuals and households? The economic theory of labor
supply takes its point of departure from a model of a single
individual who faces certain market opportunities. In the
simplest version of this model, the wage rate per hour worked
is constant, so that earnings are proportional to hours worked.
In deciding how many hours to work, the individual takes
account both of the fact that higher earnings make it possible to
consume more, but that it also costs something in the form of
less leisure. At the optimal number of hours worked, it must be
the case that the subjective marginal value of leisure equals the
real after-tax wage rate. For longer hours of work the subjective
value of leisure is higher than the wage rate; at shorter hours it
is less.
http://dx.doi.org/10.1016/B978-0-08-097086-8.71043-9

Now consider what happens if the marginal tax rate
increases. Two effects can be identified. First, since the reward
to labor at the margin falls, there is an incentive to work less;
this is called the substitution effect. Second, since the tax
increase means that the taxpayer is less well off than before, his
marginal valuation of leisure falls; this is what is known as the
income effect, which in itself tends to increase work effort.
Clearly, the two effects pull in opposite direction, so that it is
not possible to formulate any clear-cut hypothesis about the
connection between the marginal tax rate and labor supply.
A common objection to this theory is that there are in fact
few individuals who are able to choose their hours of work
freely, and that the theory, therefore, tends to focus attention
on a problem of little importance. In the short run this is
certainly true for a large number of employees. However, the
theory can be interpreted in a number of different ways to make
it applicable to many more aspects of labor supply. Consider,
for example, a young worker who is entering the labor force
and considering different job opportunities. Some jobs are
offering long hours and high earnings, while others promise
more leisure time at the cost of lower earnings. The occupa-
tional choice between job alternatives can in fact be modeled in
a way that is formally similar to the hours of work model, and
the substitution and income effects of taxation emerge in this
setting as well. The same is true of models of the choice of
retirement age; a tax increase decreases the reward to a further
extension of one’s working life and creates an incentive to
earlier retirement (the substitution effect), but it also makes it
necessary to work longer than before to achieve a given stan-
dard of living during retirement (the income effect).
The consideration of retirement raises the more general
issue of labor force participation. For some people, taxation
may influence their decision on whether or not to participate in
the labor market. Income from labor, provided that they decide
to work, will be compared to the income that they can count on
if they do not work. Alternative sources of income may be
income from capital, earnings by family members, income
derived from black market work or other illegal activities as
well as social assistance and other forms of public support. The
tax rate that is relevant for the participation decision is not so
much the marginal as the average rate. The crucial point is how
much income from labor will be reduced by the total amount
of tax paid on this income.
A number of attempts have been made to estimate models
of labor supply and taxation using econometric methods. Since
the nature of the data sets employed in these studies differs
considerably, one might expect that the results would be highly
specific with respect to the country, the time, and the nature of
the industry to which the data pertain. This is true to some
extent, but there are also some general results that characterize
a large number of studies. One is that the labor supply of
women tends to be more elastic with respect to tax changes
than that of men. When women’s marginal tax rates go up, they
tend to work significantly less, whereas for men one typically
finds very small effects. Attempts have also been made to
follow the theoretical model and estimate the substitution and
income effects separately. One then frequently finds that the
reason the total effect for men is small is not that both effects
are insignificant, but rather while each is of substantial
magnitude, they tend to cancel each other. Moreover, women’s
Income Taxes 745
participation rate tends to be more sensitive to taxation than
that of men.
How is one to interpret the result that the labor supply of
women is more elastic than that of men? The most natural
explanation is that in most data sets, women tend to be the
secondary breadwinners in the family; they tend to work
shorter hours and have lower earnings than their male partners.
Variations in family labor supply in response to tax changes
will, therefore, most naturally take the form of adjustments in
the hours of work and labor force participation by women.
In the theoretical framework sketched above, leisure was
implicitly defined as the amount of time not spent working in
the labor market. But as a matter of fact people spend a lot of
time in household work; studies of time use tend to show that
household work takes up about as much time on the average as
work in the labor market. The substitution effect of higher taxes
in favor of leisure is accordingly also in favor of household
work; in other words, the income tax ‘subsidizes’ labor used in
household production.
The tax rates that are relevant for the theoretical and
empirical study of labor supply are most naturally considered
to be simply the statutory rates of the tax law. However, in
some contexts it is necessary to take a broader view. Suppose
that an individual or household receives a transfer, in cash or in
kind, which is income contingent; in order to qualify for it,
one’s income must not exceed a certain limit. Imagine now that
the income of a particular household increases from some-
where below this limit to somewhere above. This increase is
subject to the statutory rate of tax, which in the case of a low-
income household, can be supposed to be relatively low. But
in addition the household loses its transfer, and this loss is in
economic terms exactly like a tax increase. The combined effect
of the statutory rate and the loss of the transfer payment results
in an effective tax rate, which could be much higher and might
even exceed 100%, thus creating a powerful disincentive to
work among low-income families, often referred to as
a ‘poverty trap.’ This is not just a theoretical possibility but has
been identified as an empirical fact in the tax and transfer
systems in a number of countries. Clearly, it is very important
to consider the interaction between tax and transfer systems in
order to avoid unintended and unfortunate consequences of
their combined effects.
The Income Tax and Economic Behavior: Saving
and Portfolio Choice
The base on which the income tax is levied includes income
from capital as well as from labor. A simple extension of the
theoretical framework so far is to imagine that the individual
lives in two periods, and that he saves some of his labor income
in the first period. This will then become available – with
interest added – in the second period. Interest income is subject
to tax. What happens to saving when the tax rate increases?
As in the labor supply case, we can identify a substitution
and an income effect of an increase in the marginal tax rate.
When the tax rate goes up, the after-tax interest rate falls and
there is an incentive to save less; this is the substitution effect.
On the other hand, the lower the net-of-tax interest is, the more
it is necessary to save in order to achieve a given level of future
746 Income Taxes
consumption, and this is the income effect. The substitution
and income effects clearly work in opposite directions. But we
also need to take account of the fact that some people are not
net savers in the first part of their life. Instead they borrow with
the loan to be repaid with interest in the later part of their life
cycle. If the interest on the loan is tax deductible, a higher rate
of tax provides an incentive to borrow more, i.e., to save less.
This, again, is the substitution effect. But now the lower interest
rate makes it possible to borrow more than before without
having to reduce future consumption; thus the income effect
on saving for a borrower is negative, not positive. Since some
people are borrowers and some lenders, the income effect for
all consumers together might not be very significant and the
substitution effect would tend to dominate. Empirical studies
also tend to show that there is in fact a negative tax effect on
saving, although the magnitude is not always very strong.
This picture of tax effects on saving seems to assume that all
saving takes the effect of lending or borrowing in some kind of
homogeneous asset. In reality, of course, people hold a port-
folio of assets (housing, bank deposits, mortgage debt, shares,
etc.,), and the income tax can therefore be expected to influence
not only the aggregate amount of saving but also the compo-
sition of the savings portfolio. This is particularly so since the
income tax law in many countries does not provide for the
taxation of different asset returns at a uniform rate. While
interest on bank deposits is often taxed at the statutory rate,
interest on some types of bonds may be tax exempt, capital
gains may be tax free provided one has held the stock for
a sufficiently long time, and the returns from collector’s assets
like art, antique furniture, rare books, and stamps are usually
not taxed at all. Empirical studies also seem to indicate that
portfolio composition is indeed very sensitive to tax effects.
In the academic literature there is one type of tax effect on
portfolio choice which has received special attention by
economic theorists. Some assets are relatively safe in the sense
that their return can be predicted with a high degree of
certainty; others are more risky. Could the income tax be ex-
pected to change the balance between safe and risky assets in
savers’ portfolios? Suppose that there is full loss offset, so that
any negative returns on risky assets can be deducted against
other income. Then one can deduce, basically from the
assumption that the individual saver is averse to risk, that an
increase in the rate of income tax will induce him to invest
more in the risky asset than before. The explanation is that
although the government takes a share of his expected return, it
also shares in the risk, thereby protecting him from the
full consequences of low or negative returns. This theoretical
insight has had a considerable influence on the way that
economists view the bias of investment incentives related to the
income tax, but the hypothesis is not an easy one to test on
empirical data. The major reason for this is, as argued above,
that there are so many other tax incentive effects on portfolio
composition that the risk substitution effect becomes very hard
to trace.
The Corporate Income Tax
All income ultimately accrues to private individuals, so that the
tax on corporate income or profits is in the last instance also
a tax on individual consumers. In fact, some economists have
suggested that it might be a good idea to abolish the tax on
corporations and instead collect all income from corporations
at the hands of the individual stockholders. But abolishing the
tax on corporations might not be a politically popular issue,
and in addition there are some real economic arguments why it
should be preserved. One is that collecting the tax at the
corporate level helps to reduce incentives for tax avoidance and
evasion; another is that it is an efficient way to collect some tax
revenue from foreign owners of domestic companies who are
not subject to the domestic tax on personal income.
In the theoretical literature there is a further argument in
favor of the corporate income tax. Assume that corporations
maximize profits and that markets are efficient. Then it would
be desirable to have taxes that do not lead to any distortions of
production and investment decisions in corporations. But if
corporations are subject to a (say) 40% tax on profits, the
decisions that would maximize profits in the absence of tax are
obviously the same as would maximize 40% of profits. Hence
the corporate income tax is neutral; it collects revenue for the
government without leading to any distortions of decisions
at the firm level and leaves the efficient market outcome
unaffected.
However, this picture is very much simplified. The main
reason for this is that the tax definition of corporate income is
in several respects different from the theoretical concept of
profits. One important source of deviation between the two lies
in the treatment of real capital depreciation. The real depreci-
ation of a piece of machinery or a building or another type of
capital equipment during a year is part of the costs of the
corporation, and in order for the corporate income tax to be
neutral, real capital depreciation should count as part of the
costs in arriving at a definition of taxable income that corre-
sponds to true profits. But a corporation may employ thou-
sands of different types of real capital, and it is not possible for
the tax authorities to allow for the deductibility of true depre-
ciation for all of these. Instead they typically allow standard
depreciation rates for large groups of capital assets such as
machines, buildings, transportation equipment, and so on. But
this means that for some types of capital the corporation is
allowed to deduct less than the true depreciation, for others
more. In its interaction with the tax depreciation rules the
corporate income tax in fact works as a selective tax on some
types of capital equipment and as a subsidy on others. Similar
issues may arise regarding interest deductibility, stock valua-
tion, and capital gains both on real and financial assets. It is,
therefore, not surprising that empirical studies, e.g., Jorgenson
and Yun (1991), tend to show that there are substantial
tax effects on production and investment decisions in
corporations.
Income Tax Evasion
Tax evasion is an illegal activity, which aims to hide taxable
income from the view of the tax authorities. It should be
distinguished from tax avoidance, which consists in trying to
reduce one’s taxable income by exploiting the tax law while
staying inside its boundaries. While the distinction between
the two may sometimes be unclear, there are at least a large

number of cases that definitely belong in the evasion category;
these are sometimes referred to as the hidden or black
economy.
Tax evasion is a risky activity. By holding back information
from the tax authorities, there is always a risk of being
discovered, in which case one typically faces a penalty rate on
the unreported income. The gain on a dollar of unreported
income, i.e., the regular rate of income tax, must be balanced
against the probable loss, which is the probability of detection
times the penalty rate of tax. When the regular income tax rate
goes up the gain increases, and this tends to encourage evasion
e.g., in the form of work in the hidden economy. Theory seems
to support the common concern that the high-tax level
encourages cheating and dishonesty. However, this should not
lead us to expect that high-tax countries necessarily have more
tax evasion than countries with lower tax levels. The extent of
evasion depends not only on the level of income taxation, but
also on a number of additional social and economic factors,
such as the level of tax enforcement and efficiency of tax
collection as well as the general attitude among taxpayers
toward government and the public sector. All of these factors
are likely to vary considerably among countries.
Theoretical hypotheses in this area are particularly hard to
confront with empirical data; in the nature of things, there are
no official statistics for the hidden economy, and survey
research faces some special difficulties in making individuals
answer questions truthfully. A number of the empirical studies
that have been made uses very indirect methods, like deducing
the size of the hidden economy from the public’s holding of
cash, and the reliability of this kind of approach is highly
disputed; see e.g., Cowell (1990). More standard approaches
tend to yield estimates which indicate that the hidden economy
has a volume of 2–10% of the gross national product of the
official economy. Many studies also indicate that evasion is
higher for self-employed than for salaried employees. This is in
good accordance with the theory, for wages and salaries are
usually reported directly by employers, so the probability of
evasion being detected is much higher for employees than for
the self-employed, implying that evasion is a less risky gamble
for the latter.
It should be added that the emphasis on rational risk-taking
behavior as an explanation of tax evasion does not imply that
in the economist’s view of the world all taxpayers are
completely amoral, reporting their income truthfully only
when a cost–benefit calculation has shown them that evasion
does not pay. There are strong indications that many taxpayers
report their true income even when underreporting could easily
go undetected, and at least part of the explanation for this are
likely to be found in peoples’ moral aversion to lying about
their true income. However, it remains a fact that a large
number of people do engage in tax evasion activities, and these
are likely to consider the risk-taking aspects of their activities in
a manner which is rational, given their preferences and atti-
tudes to risk. For further discussion see e.g., Sandmo (2012).
The Income Tax and the Redistribution of Income
It is widely accepted in most countries that the income tax
should take account of the taxpayer’s ability to pay, and the
Income Taxes 747
most common interpretation of this principle is that the tax
should be progressive. This raises the question of whether the
income tax in fact has led to a situation where posttax or
disposable income is more evenly distributed than pretax or
factor income. In most empirical studies the answer to this
question is an affirmative one, although the estimated magni-
tude of the redistributive effect varies substantially. A general
feature of empirical studies is that the redistributive effect
is smaller than the formal progressivity of the income tax
schedule would lead one to expect, and the main reason for this
is the role played by exemptions or tax credits. As an example,
suppose that mortgage interest payments are fully deductible
and that their share of gross income tends to increase with
income. Then, as gross income increases, taxable income
increases less than disposable income in percentage terms, and
this mitigates the increase in the effective average tax rate. The
importance of this effect has been well documented in
a number of studies, such as Wagstaff et al. (1999).
From a theoretical point of view one would expect that the
progressivity of the tax system would have an effect on pretax
incomes. The markets for at least some occupations would react
to high marginal tax rates by increasing gross incomes; this is
the problem of tax incidence. Since the gross incomes that
would have existed had there been no income tax or a purely
proportional tax, are unobservable, this observation makes it
much more difficult to study the redistributive impact of the
income tax. In this connection it is interesting to observe that
countries with a high degree of pretax inequality also tend to be
the ones with high posttax inequality, and moreover that the
redistributive impact of the income tax is high in some coun-
tries, which have a low degree of inequality in pretax incomes
(Wagstaff et al., 1999). However, it is not clear whether this
means that the incidence problem is in fact of little importance
or whether there is some other explanation. If public opinion is
dominated by egalitarian social and political values, these may
be reflected not only the progressivity of the tax system, but also
in the structure of pretax earnings.
The Income Tax, Economic Efficiency,
and the Equality–Efficiency Trade-Off
The income tax has always been under attacks from critics for
leading to distortions of economic incentives and consequently
to inefficient social outcomes. The criticism has been especially
focused on the distortion of work incentives, which leads to
incentives to work less than would be desirable from a social
point of view. As pointed out in Section The Income Tax and
Economic Behavior: Labor Supply above, there is clear evidence
for such an effect in the case of women, while for men the net
effect tends to be very small. However, in considering the effi-
ciency loss from income taxation, it is the substitution effects,
and not the total effects, that should concern us. The reason is
that the income effects would always be present, whatever the
form of the tax system (and given the amount of revenue to be
collected). The substitution effects are the direct consequences
of the distortion of wages as efficient market prices, and if our
sole concern is with efficiency, we should attempt to design the
tax system in such a way as to make the substitution effects as
small as possible. Similar concerns are relevant in judging the
748 Income Taxes
effects of income taxation on saving and investment behavior.
The taxation of interest income might lead consumers to save
less and to invest in the assets or industries with the most
favorable tax rules rather than in those with the highest rates of
return.
However, efficiency is not the only standard by which to
judge the income tax. As demonstrated in the progressive
structure of the income tax in most countries, one of the goals
of income taxation is to redistribute income from the rich to
the poor, and the gains on the side of redistribution must be set
against the cost of a less efficient allocation of resources. This is
a recurrent problem in the design of economic policy; there is
a need to choose a trade-off between equality and efficiency.
However, if more equality is a real goal of economic policy, it
should presumably be worth some cost in terms of less
economic efficiency in order to achieve it. These ideas have
been formalized in the theory of optimal income taxation as
first formulated by Mirrlees (1971). This theory attempts to
show how the optimal schedule of income taxation – in
particular, the taxation of income from labor – depends both
on the efficiency cost, as measured by the elasticity of labor
supply, and by the social attitude to inequality. On the one
hand, the more elastic labor supply is with respect to the
marginal tax rate, the lower should the tax rates be. On the
other hand, the more pronounced society’s taste for equality is,
the stronger is the case for a progressive tax schedule. Clearly,
what economic theory can contribute to this issue is not to
produce exact numbers, but to help establish a logically
consistent way of thinking about a complex issue that involves
both economics and ethics (Sandmo, 1999). By varying the
assumptions made about value judgments, the structure of
labor supply and the distribution of earnings, the theoretical
analysis helps to clarify how conclusions about the desirable
form of income taxation can be derived from a consistent
framework of economic analysis.
Proposals for Tax Reform
A number of proposals have been advanced for basic reform of
the income tax system, frequently motivated by the desire to
improve the terms of the equality–efficiency trade-off. For
example, is it possible to achieve the same degree of redistri-
bution at a lower efficiency cost? Tax reforms in a number of
Western countries during the last couple of decades have tried
to move in this direction by decreasing the formal degree of
progressivity in the tax system, while at the same time elimi-
nating many of the deductions and exemptions that had
contributed to a lower degree of effective progressivity.
Studies of the American (Auerbach and Slemrod, 1997) and
Scandinavian (Agell et al., 1996; Sørensen, 1998) reforms of
the 1980s and 1990s, do in fact conclude that their overall
effects have been to leave the redistributive effects of the tax
system virtually unaffected, while removing many of the tax
distortions both in labor and capital markets. The Scandina-
vian countries were pioneers in introducing the principle of
dual income taxation whereby labor income is taxed at
progressive rates while income from capital is taxed at a flat rate
(the same for personal and corporate income), which is
considerably lower than the marginal tax on labor income. The
main motivation behind this version of the income tax has
been to reduce the opportunities for tax arbitrage with respect
to capital income, thereby leading to a system, which is argu-
ably both more efficient and more equitable.
A more radical proposal for reform is the adoption of a so-
called flat tax. There are several versions of this, but one that
was proposed by Hall and Rabushka (1995) and has been
much discussed in the United States involves imposing
a constant marginal tax rate on all income above a certain
exemption level. Although the name of the tax indicates that
the major point in its favor is the simplification of the tax
structure, probably its more important features are the elimi-
nation of a large number of deductions and a more uniform
taxation of income from capital. In this, it is in line with the
general trends in the reforms of the 1980s and 1990s.
Another reform, whose intellectual history goes back a long
time and which was much discussed during the late 1970s and
early 1980s was the possible adoption of an expenditure tax
(Meade Committee, 1978; Kay and King, 1990). Although the
expenditure tax is often seen as an alternative to the income tax,
it may also be regarded as simply a particular form of income
taxation. Briefly, an expenditure tax is an income tax with full
deduction for all saving, but with negative saving being added
to income. What is taxed is accordingly expenditure or
consumption, not income. There are two main claims for the
expenditure tax. First, since differences in the standard of living
between persons are primarily related to their consumption,
not income, consumption is the more logical base on which to
level a progressive tax. Second, the treatment of saving and
dissaving leads to a more uniform and, therefore, more efficient
taxation of capital income. Although neither the expenditure
tax nor the flat tax have so far achieved any direct political
success, the political and economic debates over these
proposals may indirectly have had considerable influence on
the reforms that were actually adopted in the following years.
A recent ambitious attempt at the analysis of tax reform is
the Mirrlees Review in the United Kingdom. Its final report
(Mirrlees Review, 2011) proposes a series of reforms of the UK
tax system, including a more transparent and coherent schedule
of progressive income taxation with rates that reflect the
available evidence on behavioral responses to taxation. The
report is based on a collection of research articles by an inter-
national group of leading experts on the economics of taxation,
including several that have a direct bearing on the design of
the income tax (Mirrlees Review, 2010). In its discussion of the
relationship between the results of economic research and the
design of policy, the report is of interest to economists and
policy makers everywhere, not just in the United Kingdom.
Income tax reform and design is an area where economic
analysis and research can make – and indeed has made –
significant contributions to policy formation.
Conclusion
Among all forms of taxation, the income tax has traditionally
been the one that has been most surrounded by political
controversy. To the individual taxpayer, the tax is much more
visible than other forms of taxation, and it is one that more
obviously affects his own economic situation. To the academic

economist, the income tax provides a fascinating area of
application of his theoretical and empirical tools of analysis
and it also gives him the opportunity to contribute to the
public debate about tax policy. The trade-off between efficiency
and equity concerns, which is basic to many aspects of
economic policy, is nowhere more prominent than in the
design of the income tax. The question of what weights one
should assign to the benefits of redistribution versus the costs
in efficiency is ultimately one that must be decided by the
political system. What the economist can contribute to the
political debate is a framework for systematic analysis and
a sense of the empirical magnitudes involved both as regards
incentives and redistribution.
See also: Corporate Taxation; Income Distribution and
Inequality: Measurement Issues; Income Inequality; Inequality,
Social; Informal and Underground Economics.
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