The perception of distributive fairness and optimal taxation under uncertainty
AbstractThis paper incorporates a preference for distributive fairness (inequity aversion) into the analysis on optimal redistributive taxation under uncertainty. We can show that introducing or strengthening the taste for distributive fairness does not affect the socially optimal tax rate (social insurance) directly. This merely works through a reduction in individual risk taking (increase in self-insurance) induced by inequity aversion. If the efficacy of self-insurance is sufficiently small, this renders taxation more desirable and therefore enhances the socially optimal tax rate. In other words, self-insurance should be complemented by social insurance in order to impair the psychic disutility stemming from income inequality. Turning to the case of moral hazard it can be shown that optimal self-insurance efforts are again increasing with the strength of inequity aversion while the effect on the optimal tax rate remains unclear.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 48912.
Date of creation: Aug 2013
Date of revision:
distributive fairness; inequity aversion; optimal taxation; redistribution; uncertainty;
Find related papers by JEL classification:
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
This paper has been announced in the following NEP Reports:
- NEP-ACC-2013-08-16 (Accounting & Auditing)
- NEP-ALL-2013-08-16 (All new papers)
- NEP-MIC-2013-08-16 (Microeconomics)
- NEP-ORE-2013-08-16 (Operations Research)
- NEP-PBE-2013-08-16 (Public Economics)
- NEP-PUB-2013-08-16 (Public Finance)
- NEP-SPO-2013-08-16 (Sports & Economics)
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