Fair and Effi cient Taxation under Partial Control:Theory and Evidence

There is clear evidence that fairness plays a role in redistribution. Individuals want tocompensate 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 incometax models with a focus on income acquisition. However, actual tax-benefit systems arebased on much more information. We introduce fairness in a tax-benefit scheme that isbased on several characteristics. The novelty is the introduction of partial control. Eachcharacteristic differs in terms of the degree of control, i.e., the extent to which it can bechanged by exerting effort. Two testable predictions result. First, the tax rate on partiallycontrollable characteristics should be lower compared to the tax rate on non-controllabletags. Second, the total effect of non-controllable characteristics on the post-tax outcomeshould be equal to zero. We estimate implicit tax rates for different characteristics in 26European countries (using EU-SILC data) and the US (using CPS data). We find a robusttendency 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). Wealso estimate the degree of fairness of tax-benefit schemes in different countries. Only theContinental countries France and Luxembourg pass the fairness test, whereas the Baltic andAnglo-Saxon countries (including the US) perform worst...