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Plug, E., van Praag, B.M.S. and Hartog, J. (1999). If we knew ability, how would we tax individuals? Journal of Public Economics, 72(2):183--211.

  • Journal
    Journal of Public Economics

The suggestion to tax people on earnings capacity instead of earnings has been around for a long time and is attractive in terms of economic efficiency. In this paper, the authors reflect on the feasibility of such a system and give an exploratory empirical implementation. They apply the Leyden welfare function of income, a survey-based measure of an individual's welfare associated with income, to derive implications for ability taxation. Under the assumption that IQ and schooling reflect earnings capacity, the authors derive the tax functions using different criteria to distribute the utility loss due to taxation.