Taxation Based on Social Norms : An Axiomatic Approach

We show in this paper how a tax law can be formulated which (i) does not distort economic incentives of individuals and firms, (ii) is based on low information requirements, and (iii) which does not violate important behavioral facts such as fairness in taxation of the subjects. That for, a social norm approach is used which replaces the individuals' utility functions in optimal taxation theory initiated by Vickrey (1945) and Diamond and Mirrless (1971). Based on axioms representing the social norms, we prove that a unique class of tax functionals exists. Furthermore, the tax functionals can be explicitly constructed and possess a concrete integral representation. This class of admissible tax functionals which are compatible with the given axioms allows to determine a tax functional which optimizes an externally given objective function. We also compare the theory to the actual Swiss tax law. In doing so, we find that all but one axiom are violated. More specifically, tax functional induced by the current law is neither monotone, nor continuous, nor additive nor time invariant. Finally, the tax law also violates the economic incentive compatibility axiom