policymakers demonstrate

Inequality and Welfare: Is Europe Special? 519
in the economist’s. In the history of economic thought they have been linked
since Edgeworth (1897). He put forward the idea that even if you are interested
in total welfare defined as the sum of individual happiness, as advocated by
Jeremy Bentham and John Stuart Mill, you should favour egalitarianism, and
in particular you should agree to progressive income taxation. This reasoning is
important because the conclusion is paradoxical. Even if one only cares about
the sum of welfare across the population, 3 one should look carefully at income
distribution. Of course, the conclusion that the more equal a society, the greater
the collective welfare defined as a sum, does not hold without assumptions.
More precisely, if the marginal utility of income is the same for each individual
and is decreasing, then the bliss point is reached for an equal distribution
of income. The result is valid, absent any cost of redistributing income and in
particular any behavioral responses. Obviously, one can immediately find people
who would object to fully confiscating individual incomes. However, the
important point is not there. This framework has been the point of departure of
the optimal income taxation à la Mirrlees (1971), who reintroduced behaviour
responses but who kept intact the two major assumptions set up by Edgeworth.
The model represents the canonical model of the welfarist tradition of optimal
income taxation and then of welfarist redistribution before the attempt of Saez
and Stantcheva (2016) to replace it by another paradigm.
12.2.5 Two Assumptions about Individual Welfare
Let us have a look at each assumption which underlies Edgeworth’s reasoning.
The decreasingness of marginal utility of income, after having been postulated
by Bentham, has been recently tested thanks to happiness surveys (Layard et al.,
2008) and is confirmed by empirical evidence. Apparently, the utility that fits
the date the most is logconcave, that is, marginal utility declines more rapidly
than it decreases with a log utility function.
On the other hand, it seems obvious that the similarity assumption could be
violated by the data. The similarity assumption is normative, but is important to
understand it in depth before rejecting it. The critics of this assumption are often
misguided. Obviously, there is no particular reason to think that a e 1000 additional
income given to two individuals who have already the same base income
would make them equally happier. However, suppose that they are equally the
same from all objective characteristics that can be gathered in any household
survey. They are the same age, they grew up in the same family, school and
neighborhood background, they are in good physical and mental health, they
have the same jobs and so on. Obviously even if they are similar from all objective
perspectives, it does not mean that they are going to assess an income
gain in the same way. So, another way of formulating this assumption is to say
that unless there is some objective characteristic that is measurable and can be