Marko Ledic - Tax-benefit revealed social preferences in Croatia

• Presenting author: Marko Ledic (Faculty of Economics, U Zagreb)

• Authors: Ledic M., Rubil I. and Urban I.

• Session: C04B - Public Choice [2] - Wednesday 16:00-17:00 - Marietta-Blau Hall

• Slides: PDF

In this paper we use the inverse-optimal approach of optimal taxation to retrieve the implicit marginal social welfare weights in Croatia. To this end, we estimate labor supply elasticities at both extensive and intensive margins and using the same data we invert the optimalincome taxation model on the distribution of gross and disposable incomes. The logic of this inversion is to use the optimality of the current tax-benefit system as given and then recover the social welfare function that would make the observed marginal tax rate schedule optimal. We show that after the reform, the social welfare weights are not declining monotonically in income which give consideration the way the optimal tax model justifies the very high distortions imposed on the working poor.