Optimal Tax Policy and the Symmetries of Ignorance

Abstract

What government-observable characteristics should determine the taxes that an individual pays and/or the transfers that she receives? This article focuses on a specific aspect of this fundamental question of tax policy: the implications of policymakers’ uncertainty regarding the outcomes of tax policy choices. The article identifies and questions two implicit premises in policy-uncertainty-based arguments against including taxable attributes other than labor earnings in the base. The first is that greater uncertainty surrounds the optimal taxation of non-labor-earnings attributes than surrounds the optimal taxation of labor earnings. The second is that tax policymakers ought to follow a kind of precautionary principle under which uncertainty regarding an attribute counsels base exclusion. The article explains why both premises are flawed.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=1967548

Keywords: Consumption Taxation, Income Taxation, Taxation of Capital Earnings, Inheritance Taxation, Redistributional Legal Rules, Optimal Taxation, Optimal Income Taxation, Optimal Redistribution, Policy Uncertainty

JEL Classification: H2, H21, H22, H23, H4, K00, K1, K34