OPTIMAL LINEAR INCOME-TAX WITH RANDOM REVENUE

This paper introduces the concept of 'risk attitudes' a government may take toward random revenue in the design of a linear income tax. It shows that the familiar trade-off formula between equity and efficiency can be derived either by assuming a 'risk-neutral' government attitude toward random revenue or by assuming no randomness of revenue. We provide numerical analysis to demonstrate that optimum tax schedules for a 'non-risk-neutral' government can significantly deviate from those for a 'risk-neutral' government.