Atkinson–Stiglitz theorem

The Atkinson–Stiglitz theorem is a theorem of public economics. It implies that no indirect taxes need to be employed where the utility function is separable between labor and all commodities. Non-linear income taxation can be used by the government and was in a seminal article by Joseph Stiglitz and Anthony Atkinson in 1976. The Atkinson–Stiglitz theorem is an important theoretical result in public economics, spawning a broad literature that delimited the conditions under which the theorem holds. For example, Emmanuel Saez, a French-American professor and economist demonstrated that the Atkinson–Stiglitz theorem does not hold if households have heterogeneous preferences rather than homogeneous ones.

In practice, the Atkinson–Stiglitz theorem has often been invoked in the debate on optimal capital income taxation. As capital income taxation can be interpreted as the taxation of future consumption over the taxation of present consumption, the theorem implies that governments should abstain from capital income taxation if non-linear income taxation were an option since capital income taxation would not improve equity by comparison to the non-linear income tax, while additionally distorting savings.