| 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. |