FISCAL ASPECTS OF THE EQUITY-EFFICIENCY TRADE-OFF

Basil Dalamagas, John Leventides () and Stefanos Tantos
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Basil Dalamagas: Department of Economics, National and Kapodistrian University of Athens, Athens, Greece
John Leventides: Department of Economics, National and Kapodistrian University of Athens, Athens, Greece
Stefanos Tantos: ��Department of Accounting and Finance, University of West Attica, Athens, Greece‡National and Kapodistrian University of Athens MBA, Athens, Greece

Global Economy Journal (GEJ), 2023, vol. 23, issue 01n04, 1-27

Abstract: This study makes an attempt to trace out the extent to which (in)direct taxation distorts consumers’ behavior, thus being a hindrance towards achieving an optimal allocation of resources between equity and efficiency targets. To substantiate our argument, a utility maximization model is built to examine whether fiscal policy restores public confidence in attaining equilibrium between the marginal rate of substitution (MRS) and the marginal rate of transformation (MRT). The validity of our model is then tested by using a sample of eleven countries. Comparing actual with optimal (in)direct tax rates, we find that the tax system of eight countries tends to favor equity over efficiency (actual direct (indirect) tax rates higher (lower) than optimal direct (indirect) tax rates) and the tax system of three countries tends to apply the efficiency principle.

Keywords: Equity-efficiency trade-off; optimal taxation; labor supple incentives; fair income distribution; growth (search for similar items in EconPapers)
JEL-codes: E62 H21 H30 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S2194565924500040

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