Welfare or Pareto-Improving Directions of Piecemeal Tax Reform
The reform of commodity taxes with a given immutable general income tax schedule is investigated. The main focus is on tax reforms which are Pareto-improving from the status quo, without recourse to lump-sum transfers. To identify feasible welfare-improving directions, we interpret the gradient projection algorithm for the adjustment of tax rates within our setting and connect the work of Tirole and Guesnerie with that of Ahmad and Stern. The so-called “inverse optimum problem” allows to infer the existence of a variety of feasible Pareto-improving directions.
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