Distribution Analysis as Welfare Analysis

This paper formalizes fixed-quantities distribution analysis as the primary ingredient in the welfare analysis of tax changes. The fixed-quantities change in tax, meaning the change in household resources resulting from the tax change ignoring any voluntary change in quantities but reflecting any impact on prices, provides an approximation to the utility impact of a proposed tax change in a specific year. Changes in output, which reflect a change in quantities, should be ignored. However, quantity changes do help determine a proposal’s effect on the government budget. Together, a revenue estimate and a distribution analysis provide the information necessary for quantitative welfare analysis of proposed tax changes.