Factors and Personal Income Distributions and Taxation in General Equilibrium

Abstract

This paper explores the relationship between the factor distribution and the personal distribution of income, and the implications for these distributions of changes in income taxation. A small general equilibrium model with CES production functions and preferences is used. A feature of the model is that it includes many individuals with heterogeneous preferences in order to generate the personal income distribution. Income differences are generated by differential labour supply responses to a given tax structure. Numerical results are obtained, including sensitivity analyses. Special attention is given to the trade-off between equity and efficiency implied by the model.