An empirically based just linear income tax system

ABSTRACT This paper develops and illustrates a method for empirically designing an income tax system that people will regard as fair. The paper begins with the classical Principles of Tax Justice, viz., as pretax income increases, three quantities should also increase – posttax income, tax amount, and tax rate. GSOEP data on residents’ pretax income and the posttax income they regard as fair are used to estimate a just linear income tax system. Analytic results include a signature standard form of the tax system showing the intertwined fates of poor and rich and the conditions which threaten fairness. Empirical results show that the estimated tax system lowers taxes for a majority of respondents, especially the relatively poorer, and substantially reduces inequality.