NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Self-Selection and Pareto Efficient Taxation

Joseph E. Stiglitz

NBER Working Paper No. 632 (Also Reprint No. r0315)
Issued in February 1981
NBER Program(s):   PE

This paper analyzes the set of Pareto efficient tax structures. The formulation of the problem as one of self-selection not only shows more clearly the similarity between this problem and a number of other problems (such as optimal pricing of a monopolist) which have recently been the subject of extensive research, but also allow the derivation of a number of new results. We establish (i) under fairly weak conditions, randomization of tax structures is desirable; (ii) if different individuals are not perfect substitutes for one another, then the general equilibrium effects -- until now largely ignored in the literatures -- of changes in the tax structure may be dominant in determining the optimal tax structure; in particular if relative wages of high ability and low ability individuals depends on the relative supplies of labor, the optimal tax structure entails a negative marginal tax rate on the high ability individuals, and a positive marginal tax rate on the low ability individuals (the magnitude of which depends on the elasticity of substitution); (iii) if individuals differ in their preferences, Pareto efficient taxation may entail negative marginal tax rates for high incomes; while (iv) if wage income is stochastic, the marginal tax rate at the upper end may be 100%.Our analysis thus makes clear that the main qualitative properties of the optimal tax structure to which earlier studies called attention are not robust to these attempts to make the theory more realistic.

download in pdf format
   (461 K)

email paper

This paper is available as PDF (461 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w0632

Published: Stiglitz, Joseph E. "Self-Selection and Pareto Efficient Taxation." Journal of Public Economics, Vol. 17, No. 2 (March 1982), pp. 213-240.

Users who downloaded this paper also downloaded these:
Stiglitz w2189 Pareto Efficient and Optimal Taxation and the New New Welfare Economics
Brito, Hamilton, Slutsky, and Stiglitz w3288 Pareto Efficient Tax Structures
Stiglitz w0694 Utilitarianism and Horizontal Equity: The Case for Random Taxation
Greenwald and Stiglitz w2651 Pareto Inefficiency of Market Economies: Search and Efficiency Wage Models
Gale and Stiglitz w3209 A Simple Proof That Futures Markets are Almost Always Informationally Inefficient
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us