If we knew ability, how would we tax individuals?

The suggestion to tax people on earnings capacity instead of earnings has been around for a long time and is attractive in terms of economic efficiency. In this paper we reflect on the feasibility of such a system and give an exploratory empirical implementation. We apply the Leyden Welfare Function of Income, a survey based measure of an individual's welfare associated with income, to derive implications for ability taxation. Under the assumption that IQ and schooling reflect earnings capacity, we derive the tax functions using different criteria to distribute the utility loss due to taxation.