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The perception of distributive fairness and optimal taxation under uncertainty

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  • Weinreich, Daniel

Abstract

This 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.

Suggested Citation

  • Weinreich, Daniel, 2013. "The perception of distributive fairness and optimal taxation under uncertainty," MPRA Paper 48912, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:48912
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    File URL: https://mpra.ub.uni-muenchen.de/48912/1/MPRA_paper_48912.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    distributive fairness; inequity aversion; optimal taxation; redistribution; uncertainty;

    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

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