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May be easiest to start with an example: let's say I'm looking to eliminate the mortgage interest deduction, but want to minimize the impact on households from doing so. I also want the change to be revenue-neutral, so I decide to offset the change with reductions to personal income tax rates.

The simplest way to do this would be to take the \$70B MID expenditure and reduce income tax rates across the board by \$70B / \$1.5T existing personal taxes, or ~5%. But MID currently benefits some income groups more than others, so this approach wouldn't minimize the adverse impact per household. To do that, we might look for the current distribution of MID benefit, and then tweak tax brackets accordingly optimizing for some loss function like median % reduction in after-tax income.

Is there a term for this type of policy design/analysis? It doesn't quite seem like Pareto optimality to me.

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  • $\begingroup$ This just sounds like optimization, albeit the minimization of a loss function. $\endgroup$ – 123 Jun 14 '17 at 17:15

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