Pareto Efficiency, Inequality and Distribution Neutral Fiscal Policy—An Overview
A structure of taxes and transfers that keep the income distribution unchanged even after positive or negative shocks to an economy, is referred as a Distribution Neutral Fiscal Policy. Marjit and Sarkar (Distribution neutral welfare ranking-extending pareto principle, 2017, ) referred this as a Strong Pareto Superior (SPS) allocation which improves the standard Pareto criterion by keeping the degree of inequality, not the absolute level of income, intact. In this paper we show the existence of a SPS allocation in a general equilibrium framework, and we provide a brief survey of distribution neutral fiscal policies existing in the literature. We also provide an empirical illustration with Indian Human Development Survey data.
Sugata Marjit is indebted to the participants of the conference titled “The Economy as a Complex System IV: Can economics be a physical science?” arranged by the Institute of Mathematical Sciences (IMSc). We are also grateful to the seminar participants at IMF, Washington D.C. in July 2017, for helpful comments. We would also like to acknowledge the helpful comments by Sanjeev Gupta of the Fiscal Affairs Department of the IMF. The usual dissimilar applies.
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