8 rates optimally vary over the life cycle and whether this pattern is re flected in the ordinary operation of typical income and social security tax schemes), that intergenerational redistribution may be involved, and that different family types are often treated differently. Second, the forced-savings dimension of social security is analyzed, focusing on myopia and other factors that are central to some justifications for the existence of social security schemes. Emphasis is placed on how social security taxes paid during working years may affect labor supply in light of the fact that individuals may be myopic and thus excessively discount benefits paid in the distant future. Some of the results are initially sur- prising: Notably, in most respects a social security system does not have the effects of an additional tax on top of an existing tax on labor income (the income tax). The sign of the labor supply effects of social security reverses under certain variations of assumptions and parameters, and as the forced-savings constraint just begins to bind there is no first-or der effect in one case but a positive effect in the other, yet one that de- clines rather than rises as the constraint tightens. Finally, more purely insurance-like features of social security are briefly considered Chapter 12 addresses the heterogeneity among family units that is central in setting income tax policy, designing transfer programs, and producing descriptive measures of the overall distribution of well-being Previously, many of the issues have proved intractable and others contro versial. Substantial redirection and illumination is provided by the pres ent approach, both by insisting that analysis be explicitly related to th social welfare function and by employing distributively offsetting income tax adjustments to focus on distinctive aspects of the problem. The chapter first analyzes the optimal relative treatment of different family types-single individuals versus couples, and those with varying num bers of children--while abstracting from incentive considerations. Rel ative allocations may depend on inequality of sharing, economies of scale different motives that underlie intrafamily sharing, and differences in how resources are translated into utility(notably, by adults compared to children). In each case, depending on traits of utility functions and the social welfare function, optimal results may differ qualitatively from stan- dard views. For example, economies of scale could favor more generous rather than less generous per capita allotments to families, and optimal allocations might favor families with children to such an extent that the 02_Kaplow_Cho1_p001-p010ndd 8
8 chapter 1 rates optimally vary over the life cycle and whether this pattern is re- fl ected in the ordinary operation of typical income and social security tax schemes), that intergenerational redistribution may be involved, and that different family types are often treated differently. Second, the forced-savings dimension of social security is analyzed, focusing on myopia and other factors that are central to some justifi cations for the existence of social security schemes. Emphasis is placed on how social security taxes paid during working years may affect labor supply in light of the fact that individuals may be myopic and thus excessively discount benefi ts paid in the distant future. Some of the results are initially surprising: Notably, in most respects a social security system does not have the effects of an additional tax on top of an existing tax on labor income (the income tax). The sign of the labor supply effects of social security reverses under certain variations of assumptions and parameters, and as the forced-savings constraint just begins to bind there is no fi rst-order effect in one case but a positive effect in the other, yet one that declines rather than rises as the constraint tightens. Finally, more purely insurance-like features of social security are briefl y considered. Chapter 12 addresses the heterogeneity among family units that is central in setting income tax policy, designing transfer programs, and producing descriptive measures of the overall distribution of well-being. Previously, many of the issues have proved intractable and others controversial. Substantial redirection and illumination is provided by the present approach, both by insisting that analysis be explicitly related to the social welfare function and by employing distributively offsetting income tax adjustments to focus on distinctive aspects of the problem. The chapter fi rst analyzes the optimal relative treatment of different family types—single individuals versus couples, and those with varying numbers of children—while abstracting from incentive considerations. Relative allocations may depend on inequality of sharing, economies of scale, different motives that underlie intrafamily sharing, and differences in how resources are translated into utility (notably, by adults compared to children). In each case, depending on traits of utility functions and the social welfare function, optimal results may differ qualitatively from standard views. For example, economies of scale could favor more generous rather than less generous per capita allotments to families, and optimal allocations might favor families with children to such an extent that the 02_Kaplow_Ch01_p001-p010.indd 8 2_Kaplow_Ch01_p001-p010.indd 8 10/16/2007 11:21:13 AM 0/16/2007 11:21:13 AM
INTRODUCTION parents are enabled to consume more resources than are made available adults without children. Then the chapter considers how these prin iples of allocation may require modification because of incentive con siderations involving labor supply, marriage, and procreation Part V revisits issues of distributive justice and social welfare that are raised by the standard welfare economic framework initially intro duced in chapter 3 and by some of its applications in subsequent chap ters. Chapter 13 examines welfarism, the view that the social assessment of policies should depend exclusively on how they affect individuals well-being. Because this approach is controversial, particularly among philosophers and some welfare economists-and more particu larly because certain prominent tax equity norms, upon examination, onflict with welfarism-a defense is sketched. It is explained that all nonwelfarist approaches violate the Pareto principle, and further atten tion is devoted to reconciling the welfarist paradigm with moral intu itions that underlie competing normative criteria. This chapter also elaborates on the concept of well-being that is central to the welfarist approach and assesses a variety of issues that have been raised with re- gard to crediting individuals preferences that might be viewed as mis- taken or otherwise objectionable. Alternatives to welfarism involving capabilities and primary goods, associated with Sen and rawls respec- tively, are shown to be problematic because, among other reasons, they transgress the Pareto principle Chapter 14 considers the choice of social welfare function within the welfarist paradigm. Specifically, should the welfare function be utili- tarian or more egalitarian? Powerful arguments developed primarily by Harsanyi and further analysis that draws on the Pareto principle and the requirement of time consistency all favor a utilitarian social welfare function. Some standard concerns are addressed, namely, about the pos sibility of interpersonal comparisons of utility and the sufficiency of the weight given to equality. In choosing a social welfare function, it is also necessary to articulate who should be considered a member of the society whose welfare is to be maximized. Should the focus be local national, or international? What about future generations? And how should society evaluate policies that affect the size of the pertinent pop ulation and thus may raise total welfare while reducing average welfare? The discussion of these issues will be brief and speculative. 02_Kaplow_Cho1_p001-p010ndd 9
introduction 9 parents are enabled to consume more resources than are made available to adults without children. Then the chapter considers how these principles of allocation may require modifi cation because of incentive considerations involving labor supply, marriage, and procreation. Part V revisits issues of distributive justice and social welfare that are raised by the standard welfare economic framework initially introduced in chapter 3 and by some of its applications in subsequent chapters. Chapter 13 examines welfarism, the view that the social assessment of policies should depend exclusively on how they affect individuals’ well-being. Because this approach is controversial, particularly among moral philosophers and some welfare economists—and more particularly because certain prominent tax equity norms, upon examination, confl ict with welfarism—a defense is sketched. It is explained that all nonwelfarist approaches violate the Pareto principle, and further attention is devoted to reconciling the welfarist paradigm with moral intuitions that underlie competing normative criteria. This chapter also elaborates on the concept of well-being that is central to the welfarist approach and assesses a variety of issues that have been raised with regard to crediting individuals’ preferences that might be viewed as mistaken or otherwise objectionable. Alternatives to welfarism involving capabilities and primary goods, associated with Sen and Rawls respectively, are shown to be problematic because, among other reasons, they transgress the Pareto principle. Chapter 14 considers the choice of social welfare function within the welfarist paradigm. Specifi cally, should the welfare function be utilitarian or more egalitarian? Powerful arguments developed primarily by Harsanyi and further analysis that draws on the Pareto principle and the requirement of time consistency all favor a utilitarian social welfare function. Some standard concerns are addressed, namely, about the possibility of interpersonal comparisons of utility and the suffi ciency of the weight given to equality. In choosing a social welfare function, it is also necessary to articulate who should be considered a member of the society whose welfare is to be maximized. Should the focus be local, national, or international? What about future generations? And how should society evaluate policies that affect the size of the pertinent population, and thus may raise total welfare while reducing average welfare? The discussion of these issues will be brief and speculative. 02_Kaplow_Ch01_p001-p010.indd 9 2_Kaplow_Ch01_p001-p010.indd 9 10/16/2007 11:21:13 AM 0/16/2007 11:21:13 AM
Chapter 15 presents and criticizes other normative criteria for the ssessment of tax policy. Consideration is given to various approach to the measurement of inequality, poverty, progressivity, and redistribu tion; the concept of horizontal equity; and classical doctrines, notably sacrifice theories, the benefit principle, and the notion of ability to pay Many of these alternative evaluative precepts are incomplete. Others are redundant, which renders them of little normative use Of greater con cern is that some are in conflict with the Pareto principle. accordingly when policy analysis gives weight to these criteria, as is sometimes done, prescriptions may be perverse in ways that are recogn ized. It is sug- gested that the appeal of these various criteria lies in their tendency to erve as proxies for aspects of social welfare; hence, some may have in strumental value in certain settings, even though they do not constitute Itimate normative objectives. Following Part V, concluding remarks are offered in chapter 16. The discussion focuses on the central virtues of the unifying conceptual framework that is developed and applied throughout the book Exam ples are drawn from various chapters to illustrate the various benefits that are generated by the sort of systematic investigation pursued here These payoffs arise particularly from use of the distribution-neutral construct, examination of the lessons that can be derived from optimal income tax analysis, and explicit reference to a social welfare function. Implications for research agendas, both analytical and empirical,are also noted 02_Kaplow_cho1_p001-p010ndd
10 chapter 1 Chapter 15 presents and criticizes other normative criteria for the assessment of tax policy. Consideration is given to various approaches to the measurement of inequality, poverty, progressivity, and redistribution; the concept of horizontal equity; and classical doctrines, notably sacrifi ce theories, the benefi t principle, and the notion of ability to pay. Many of these alternative evaluative precepts are incomplete. Others are redundant, which renders them of little normative use. Of greater concern is that some are in confl ict with the Pareto principle. Accordingly, when policy analysis gives weight to these criteria, as is sometimes done, prescriptions may be perverse in ways that are unrecognized. It is suggested that the appeal of these various criteria lies in their tendency to serve as proxies for aspects of social welfare; hence, some may have instrumental value in certain settings, even though they do not constitute ultimate normative objectives. Following Part V, concluding remarks are offered in chapter 16. The discussion focuses on the central virtues of the unifying conceptual framework that is developed and applied throughout the book. Examples are drawn from various chapters to illustrate the various benefi ts that are generated by the sort of systematic investigation pursued here. These payoffs arise particularly from use of the distribution-neutral construct, examination of the lessons that can be derived from optimal income tax analysis, and explicit reference to a social welfare function. Implications for research agendas, both analytical and empirical, are also noted. 02_Kaplow_Ch01_p001-p010.indd 10 2_Kaplow_Ch01_p001-p010.indd 10 10/16/2007 11:21:14 AM 0/16/2007 11:21:14 AM
PART I: FRAMEWORK 03_Kaplow_Ch02_p011-p034 ndd 11
PART I: FRAMEWORK a 03_Kaplow_Ch02_p011-p034.indd 11 3_Kaplow_Ch02_p011-p034.indd 11 10/16/2007 11:21:26 AM 0/16/2007 11:21:26 AM
An IntegratedⅤiew Ideally, policy analysis attempts to consider completely specified poli cies, take a comprehensive view of the problem at hand with regard to potentially useful instruments, and present and assess alternatives in a comparable manner. These features are particularly important in devel- ping a theory of taxation and in examining related subjects in public Completeness means that a policy must be fully articulated in all pertinent respects. An important requirement in the present setting is budget balance. In spite of its familiarity, its dictates are sometimes for gotten, which can lead analysis astray--for example, by omitting income and substitution effects of expenditures that in many cases are in op- position to those of the taxes that finance them, and also by ignoring distributive consequences of expenditures. Furthermore, when examin- ing any given tax or expenditure policy, there exists a variety of ways to make the specification complete, each of which may have different im- plications for the extent of redistribution and other welfare-relevant considerations. Hence, additional guidance in choosing how to com- lete the arv Comprehensiveness indicates the need to consider all pertinent policy instruments. One would not usually want to use a screwdriver or a knife to pound nails if a hammer were available. Likewise, in considering how one might employ estate and gift taxation to raise revenue or increase redistribution, the availability of the income tax should be kept in mind. See, for example, Musgrave's(1959, pp. 212-215)discussion of"differential tax inci- dence, "and consider also the broader notion of"balanced-budget incidence 03_Kaplow_Ch02_p011-p034 ndd 13 1016/20071121:27AM
2 An Integrated View a Ideally, policy analysis attempts to consider completely specifi ed policies, take a comprehensive view of the problem at hand with regard to potentially useful instruments, and present and assess alternatives in a comparable manner. These features are particularly important in developing a theory of taxation and in examining related subjects in public economics. Completeness means that a policy must be fully articulated in all pertinent respects. An important requirement in the present setting is budget balance.1 In spite of its familiarity, its dictates are sometimes forgotten, which can lead analysis astray—for example, by omitting income and substitution effects of expenditures that in many cases are in opposition to those of the taxes that fi nance them, and also by ignoring distributive consequences of expenditures. Furthermore, when examining any given tax or expenditure policy, there exists a variety of ways to make the specifi cation complete, each of which may have different implications for the extent of redistribution and other welfare-relevant considerations. Hence, additional guidance in choosing how to complete the system is necessary. Comprehensiveness indicates the need to consider all pertinent policy instruments. One would not usually want to use a screwdriver or a knife to pound nails if a hammer were available. Likewise, in considering how one might employ estate and gift taxation to raise revenue or increase redistribution, the availability of the income tax should be kept in mind. 1 See, for example, Musgrave’s (1959, pp. 212–215) discussion of “differential tax incidence,” and consider also the broader notion of “balanced-budget incidence.” 03_Kaplow_Ch02_p011-p034.indd 13 3_Kaplow_Ch02_p011-p034.indd 13 10/16/2007 11:21:27 AM 0/16/2007 11:21:27 AM