What is Atkinson-Stiglitz Theorem?

Legal Definition
The Atkinson–Stiglitz theorem is a theorem of public economics which states "that, where the utility function is separable between labor and all commodities, no indirect taxes need be employed" if non-linear income taxation can be used by the government and was developed in a seminal article by Joseph Stiglitz and Anthony Atkinson in 1976. The Atkinson–Stiglitz theorem is generally considered to be one of the most important theoretical results in public economics and spawned a broad literature which delimited the conditions under which the theorem holds, e.g. Saez (2002) which showed that the Atkinson–Stiglitz theorem does not hold if households have heterogeneous rather than homogeneous preferences. In practice the Atkinson–Stiglitz theorem has often been invoked in the debate on optimal capital income taxation: Because capital income taxation can be interpreted as the taxation of future consumption in excess of the taxation of present consumption, the theorem implies that governments should abstain from capital income taxation if non-linear income taxation is an option since capital income taxation would not improve equity by comparison to the non-linear income tax, while additionally distorting savings.
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