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Fair and Efficient Taxation under Partial Control: Theory and Evidence

46 Pages Posted: 18 Jan 2011  

Erwin Ooghe

Catholic University of Leuven (KUL) - Center for Economic Studies

Andreas Peichl

Centre for European Economic Research (ZEW); University of Mannheim - School of Economics (VWL); IZA Institute of Labor Economics; University of Essex - Institute for Social and Economic Research (ISER)

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Date Written: December 1, 2010

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.

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

JEL Classification: D6, H2, I3

Suggested Citation

Ooghe, Erwin and Peichl, Andreas, Fair and Efficient Taxation under Partial Control: Theory and Evidence (December 1, 2010). Available at SSRN: https://ssrn.com/abstract=1739691 or http://dx.doi.org/10.2139/ssrn.1739691

Erwin Ooghe (Contact Author)

Catholic University of Leuven (KUL) - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Andreas Peichl

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim - School of Economics (VWL) ( email )

Mannheim 68131
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University of Essex - Institute for Social and Economic Research (ISER)

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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