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The Hedonic Theory of Taxation: An Application to the U.S. Income Tax

Author: DONALD F. VITALIANO
Published in PFM, Vol. 18 No. 3

F.Y. Edgeworth labeled the utility sacrifice theory of taxation the Hedonic Theory of Taxation. According to this model, each household unit should bear a portion of the aggregate tax burden so as to sacrifice the same amount of utility or the same pro-portion of their utility from income. This was long regarded as an appealing but im-practical idea owing to the inability to measure cardinal utility. But the recent ‘Happi-ness’ survey literature has resulted in credible estimates of a cardinal utility function, and this is used in this paper to apply the hedonic model to the 2010 U.S. Personal Income Tax in a revenue neutral setting. The result is a moderately progressive per-sonal income tax, with a top quintile average rate of about 11% and a top percentile average rate of about 17%, the latter being less than at present. As compared to optimal tax models, hedonic taxation is simple and the notion of equal sacrifice ap-pears to enjoy public support. We find little difference in average rates between equal absolute and equal proportional sacrifice.

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