The Enigma of the Income Tax

Abstract

The objective of this paper is to propose an alternative formulation of income tax that is based on simultaneous utility maximization of both the taxpayer and the government. This method is different from both the fixed income tax method which applies a fixed rate irrespective of the income level, and the graduated income tax formulation which is based on incremental tax rates. Welfare properties of the simultaneous utility maximization income tax formulation such as Pareto optimality, majority voting, social optimality, and unproductive taxation are studied. It is proven that the utility based taxation satisfies all welfare properties.