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Efficiency Gains from Tagging
The paper deals with the efficiency gains from tagging, that is a policy where separate income tax schedules are designed for different groups of the population. We first show that tagging can make income taxation more efficient if either the initial tax rates are close to the Rawlsian tax rates or if the distribution of income in one of the groups differs substantially from that in the population. Second, we show that there is a trade-off between efficiency and horizontal equity if and only if the skill-distribution has the same support in all groups. Third, we establish that a Pareto-superior outcome cannot be implemented by increasing the tax burden of high-income groups, but can involve higher tax payments for low-income groups.
