Optimal tax | EPFL Graph Search

Are you an EPFL student looking for a semester project?

Work with us on data science and visualisation projects, and deploy your project as an app on top of GraphSearch.

Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that maximises a social welfare function subject to economic constraints. The social welfare function used is typically a function of individuals' utilities, most commonly some form of utilitarian function, so the tax system is chosen to maximise the aggregate of individual utilities. Tax revenue is required to fund the provision of public goods and other government services, as well as for redistribution from rich to poor individuals. However, most taxes distort individual behavior, because the activity that is taxed becomes relatively less desirable; for instance, taxes on labour income reduce the incentive to work. The optimization problem involves minimizing the distortions caused by taxation, while achieving desired levels of redistribution and revenue. Some taxes are thought to be less distorting, such as lump-sum taxes (where individuals cannot change their behaviour to reduce their tax burden) and Pigouvian taxes, where the market consumption of a good is inefficient, and a tax brings consumption closer to the efficient level. In the Wealth of Nations, Adam Smith observed that “Good taxes meet four major criteria. They are (1) proportionate to incomes or abilities to pay (2) certain rather than arbitrary (3) payable at times and in ways convenient to the taxpayers and (4) cheap to administer and collect.” Generating a sufficient amount of revenue to finance government is arguably the most important purpose of the tax system. Optimal taxation theory attempts to derive the system of taxation that will achieve the desired revenue and income distribution with the least inefficiency—that is, that interferes least with market participants making Pareto optimal exchanges—economic transactions that make both parties better off. Free Market economies use prices to allocate resources to produce the products society wants most. If demand exceeds supply, the price will rise as those who want the product most compete to buy it.

About this result

This page is automatically generated and may contain information that is not correct, complete, up-to-date, or relevant to your search query. The same applies to every other page on this website. Please make sure to verify the information with EPFL's official sources.

Related concepts (13)

Related courses (2)

Related lectures (20)

Excess burden of taxation

In economics, the excess burden of taxation, also known as the deadweight cost or deadweight loss of taxation, is one of the economic losses that society suffers as the result of taxes or subsidies. Economic theory posits that distortions change the amount and type of economic behavior from that which would occur in a free market without the tax. Excess burdens can be measured using the average cost of funds or the marginal cost of funds (MCF). Excess burdens were first discussed by Adam Smith.

Single tax

A single tax is a system of taxation based mainly or exclusively on one tax, typically chosen for its special properties, often being a tax on land value. The idea of a single tax on land values was proposed independently by John Locke and Baruch Spinoza in the 17th century. The French physiocrats later coined the term impôt unique because of the unique characteristics of land and rent.

FairTax

FairTax is a single rate tax proposal which has been proposed as a bill in the United States Congress regularly since 2005 that includes complete dismantling of the Internal Revenue Service. The proposal would eliminate all federal income taxes (including the alternative minimum tax, corporate income taxes, and capital gains taxes), payroll taxes (including Social Security and Medicare taxes), gift taxes, and estate taxes, replacing them with a single consumption tax on retail sales.

Asset Selling Problems

Discusses asset selling problems and optimal selling policies based on market conditions and termination states.

Fiscal Policy and Economic Situation

Delves into the economic and fiscal landscape, analyzing potential output, fiscal stance, government debt, and the effects of government spending shocks.

Regulating Market Externalities

Explores regulating market externalities through taxes, subsidies, and tradable quotas to achieve optimal production levels and internalize external costs.

FIN-406: Macrofinance

This course provides students with a working knowledge of macroeconomic models that explicitly incorporate financial markets. The goal is to develop a broad and analytical framework for analyzing the

MGT-454: Principles of microeconomics

The course allows students to get familiarized with the basic tools and concepts of modern microeconomic analysis. Based on graphical reasoning and analytical calculus, it constantly links to real eco