EQUAL SACRIFICE AND INCENTIVE COMPATIBLE INCOME TAXATION

The concepts of equal sacrifice and incentive compatibility in income taxation have been of interest to economists for some time. Here we attempt to integrate the two literatures in a model that offers a labor-leisure choice to consumers while imposing an equal relative or absolute sacrifice tax system. The main result is that equal sacrifice incentive compatible income tax systems generally exist and are locally unique. Examples are presented where this tax system is easy to compute. Comparative statics are calculated. Finally, some remarks about the welfare properties of these tax systems are made.