On Efficient Taxation

Abstract

This paper solves an often neglected problem of efficient taxation where the policymaker is interested in minimizing the dead weight burden imposed on the society by labor income taxes. Specifically, it argues that the efficient tax function assumes the form of a step function. Furthermore, it allows the policymaker to exhibit aversion towards inequality and shows that the key result prevails, (i.e., that the tax function that ensures efficiency is locally flat).