Abstract

We study optimal labor income taxation when the objective of the planner combines the ethical properties of Pareto eciency, responsibility for one's preferences and poverty reduction. We construct social preferences satisfying these three properties. Then, we derive the formula of the optimal income tax schedule and we calibrate it for the US economy. We nd that 1) zero and negative marginal tax rates on low-incomes are optimal, 2) there is bunching at the level of income chosen by the most-hardworking minimum wage households, and 3) marginal tax rates on high incomes are higher than the current rates in the US but potentially lower than those implied by zero marginal welfare weights in the Pareto tail.

JEL Classication: H21, D63.

Keywords: optimal taxation, responsibility, poverty reduction.