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

PFM, Vol. 18 No. 3, (2018)

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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