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Horizontal Inequality In Optimaltaxation: Evidence From A Development Context

Author

Listed:
  • Magnus Eldrup

    (Department of Economics, University of Copenhagen)

Abstract

Exemptions are a key feature of income tax systems in developing countries, yet standard optimal tax models cannot explain them. By assuming full compliance, these models ignore horizontal inequality between formal and informal workers, understating the social cost of taxing the former. Extending the optimal tax framework, I incorporate informality and horizontal inequality aversion. I conduct a survey experiment in Kenya, finding that respondents place substantially higher welfare weight on formal taxpayers than otherwise identical informal workers. Combining these empirical preferences with administrative tax data yields prescriptions of high exemption thresholds matching observed policy, a result alternative explanations cannot rationalize.

Suggested Citation

  • Magnus Eldrup, 2026. "Horizontal Inequality In Optimaltaxation: Evidence From A Development Context," CEBI working paper series 26-18, University of Copenhagen. Department of Economics. The Center for Economic Behavior and Inequality (CEBI).
    • Handle: RePEc:kud:kucebi:2619
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    File URL: https://www.econ.ku.dk/cebi/publikationer/working-papers/CEBI_WP_19-26.pdf
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    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments

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