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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. Such fairness considerations have been introduced in political economy and optimal income tax models with a focus on income acquisition. However, actual tax-benefit systems are based on much more information. We introduce fairness in a tax-benefit scheme that is based on several characteristics. The novelty is the introduction of partial control. Each characteristic differs in terms of the degree of control, i.e., the extent to which it can be changed by exerting effort. Two testable predictions result. First, the tax rate on partially controllable characteristics should be lower compared to the tax rate on non- controllable tags. Second, the total effect of non-controllable characteristics on the post-tax outcome should be equal to zero. We estimate implicit tax rates for different characteristics in 26 European countries (using tEU-SILC data) and the US (using CPS data). We find a robust tendency in all countries to compensate more for the uncontrollable composite characteristic (based on sex, age and disability in our study) compared to the partially controllable one (based on family composition, immigration status, unemployment and education level). We also estimate the degree of fairness of tax-benefit schemes in different countries. Only the Continental countries France and Luxembourg pass the fairness test, whereas the Baltic and Anglo-Saxon countries (including the US) perform worst.

Suggested Citation

  • Erwin OOGHE & Andreas PEICHL, 2010. "Fair and efficient taxation under partial control: theory and evidence," Working Papers of Department of Economics, Leuven ces10.32, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
  • Handle: RePEc:ete:ceswps:ces10.32
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    2. Niehues, Judith & Peichl, Andreas, 2011. "Lower and Upper Bounds of Unfair Inequality: Theory and Evidence for Germany and the US," IZA Discussion Papers 5834, Institute of Labor Economics (IZA).
    3. Erik Figueiredo & Cleiton R. Silva, 2014. "Note on Fairness and Income Redistribution in the Latin American Countries," Economics Bulletin, AccessEcon, vol. 34(2), pages 1259-1267.
    4. Olivier Bargain & André Decoster & Mathias Dolls & Dirk Neumann & Andreas Peichl & Sebastian Siegloch, 2013. "Welfare, labor supply and heterogeneous preferences: evidence for Europe and the US," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 41(4), pages 789-817, October.
    5. Erik Alencar de Figueiredo & Cleiton Roberto da Fonseca Silva, 2012. "Fairness and Income Redistribution- an Analysis of the Latin American Tax System," Série Textos para Discussão (Working Papers) 4, Programa de Pós-Graduação em Economia - PPGE, Universidade Federal da Paraíba.
    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.
    7. Erwin Ooghe & Andreas Peichl, 2015. "Fair and Efficient Taxation under Partial Control," Economic Journal, Royal Economic Society, vol. 125(589), pages 2024-2051, December.
    8. Spencer Bastani, 2013. "Gender-based and couple-based taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(4), pages 653-686, August.
    9. 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.
    10. 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 34, AIAS, Amsterdam Institute for Advanced Labour Studies.

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    More about this item

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General

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