nep-pub 2013-08-16 papers

on Public Finance

Issue of 2013‒08‒16
one paper chosen by
Kwang Soo Cheong
Johns Hopkins University

The perception of distributive fairness and optimal taxation under uncertainty By Weinreich, Daniel

The perception of distributive fairness and optimal taxation under uncertainty

By:	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.
Keywords:	distributive fairness; inequity aversion; optimal taxation; redistribution; uncertainty
JEL:	D63 H21 H53
Date:	2013–08
URL:	http://d.repec.org/n?u=RePEc:pra:mprapa:48912&r=pub

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