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Fair and Efficient Taxation under Partial Control: Theory and Evidence

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  • Erwin Ooghe
  • Andreas Peichl

Abstract

There is clear evidence that fairness plays a role in redistribution. Individuals want to compensate others for their misfortune, while they allow them to enjoy the fruits of their effort. This paper introduces fairness in a tax-benefit scheme that is based on several characteristics in order to study the design of optimal taxes where people have what we call ‘partial control’. For some characteristics like sex, age and inborn handicaps the degree of control is zero (i.e., these characteristic are exogenous tags fully defined by the individual’s type), while for other characteristics, think of education and family composition, the degree of control is positive, i.e. it can be changed by exerting effort. We derive the fair tax benefit formula as well as two testable predictions. We provide the first estimates of implicit tax rates for different characteristics in 26 European countries (using EU-SILC data) and the US (using CPS data) and find a robust tendency in all countries to compensate more for uncontrollable characteristics compared to the partially controllable ones. We then attempt to calculate which countries currently have fair tax systems. Only the Continental countries France and Luxembourg pass the fairness test, whereas the Baltic and Anglo-Saxon countries (including the US) perform worst. Our paper provides a new way to formalize the old intuition that, in a fair society, people should be allowed to benefit more from their own efforts than from exogenous characteristics like their genetic endowment.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3518.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3518

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Keywords: fairness; redistribution; tax-benefit schemes; tagging; optimal taxation;

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References

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Cited by:
  1. Bargain, Olivier & Decoster, André & Dolls, Mathias & Neumann, Dirk & Peichl, Andreas & Siegloch, Sebastian, 2011. "Welfare, Labor Supply and Heterogeneous Preferences: Evidence for Europe and the US," IZA Discussion Papers 6102, Institute for the Study of Labor (IZA).
  2. Judith Niehues & Andreas Peichl, 2011. "Lower and Upper Bounds of Unfair Inequality: Theory and Evidence for Germany and the US," SOEPpapers on Multidisciplinary Panel Data Research 395, DIW Berlin, The German Socio-Economic Panel (SOEP).
  3. Bastani, Spencer, 2012. "Gender-Based and Couple-Based Taxation," Working Paper Series, Center for Fiscal Studies, Uppsala University, Department of Economics 2012:6, Uppsala University, Department of Economics.
  4. Niehues, J. (Judith) & Andreas Peichl, 2012. "GINI DP 34: Bounds of Unfair Inequality of Opportunity: Theory and Evidence for Germany and the US," GINI Discussion Papers, AIAS, Amsterdam Institute for Advanced Labour Studies 34, AIAS, Amsterdam Institute for Advanced Labour Studies.
  5. Judith Niehues & Andreas Peichl, 2012. "Bounds of Unfair Inequality of Opportunity: Theory and Evidence for Germany and the US," CESifo Working Paper Series 3815, CESifo Group Munich.
  6. Yochanan Shachmurove & Reuel Shinnar (Deceased), 2012. "Do Chemical Reactors Hold the Solution for Global Economic Crises?," PIER Working Paper Archive 12-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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