Well-Being, Poverty, and Labor Income Taxation: Theory and Application to Europe and the United States

In a model where agents differ in wages and preferences over labor time–consumption bundles, we study labor income tax schemes that alleviate poverty. To avoid conflict with individual well-being, we require redistribution to take place between agents on both sides of the poverty line provided they have the same labor time. This requirement is combined with efficiency and robustness prop- erties. Maximizing the resulting social preferences under incentive compatibility constraints yields the following evaluation criterion: tax schemes should minimize the labor time required to reach the poverty line. We apply this criterion to European countries and the United States.