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The perception of distributive fairness and optimal taxation under uncertainty

Daniel Weinreich

MPRA Paper from University Library of Munich, Germany

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 (search for similar items in EconPapers)
JEL-codes: D63 H21 H53 (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-acc, nep-mic, nep-ore, nep-pbe, nep-pub and nep-spo
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