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Taxation behind the veil of ignorance

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Abstract

We explore the design of impartial tax schemes in a simple setup where agents’ incomes are completely determined by their inborn talents. Building on Harsanyi’s veil-of-ignorance approach, we conceptualize an impartial observer who chooses a tax scheme without knowing her own preferences and the distribution of talents, and whose vNM preferences behind the veil obey Harsanyi’s principle of acceptance and are independent, in terms of utility-scale, of the distribution of talents. Our results in the resulting framework provide three main messages: (i) the veil of ignorance implies anonymity of tax schemes; (ii) the veil of ignorance generically rejects utilitarian tax schemes; (iii) the veil of ignorance endorses the (Rawlsian) leveling tax scheme.

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Notes

  1. “These principles primarily apply, as I have said, to the basic structure of society and govern the assignment of rights and duties and regulate the distribution of social and economic advantages.” (Rawls 1999, p. 53).

  2. In other words, we assume that labor is perfectly inelastically supplied.

  3. O'Neill (1982) used earlier the same mathematical framework to analyze the problem of adjudicating conflicting claims. Readers are referred to Moulin (2002) or Thomson (2003, 2015, 2019) for extensive treatments of diverse problems (such as taxation, conflicting claims, bankruptcy, cost sharing, and surplus sharing) fitting this framework.

  4. Thus, we rule out subsidies as means of redistribution.

  5. This holds under the constraint of claims-boundedness. It is straightforward to show that, in our model, the leveling tax profile is the best one under the lexicographic extension of the Rawlsian maximin principle.

  6. The equivalence also holds if covariance-anonymity is replaced with weak covariance-anonymity, i.e., for each \(\pi \in \Pi\) and each pair \(i,j\in N\) with \(i\ne j\) and \(\pi (i)=j\), whenever \(\pi (h)=h\), for all \(h\in N\), \(f_{h}(y_{\pi },R)=f_{h}(y,R)\), then \(f_{i}(y_{\pi },R)=f_{j}(y,R)\).

  7. A somewhat related, albeit different, alternative is the so-called notion of probabilistic egalitarianism (e.g., Lerner 1944; Sen 1973) that we shall not treat here.

  8. The correlation between talent (cognitive ability) and risk aversion has been long studied. Recent evidence indicates that it is domain specific and not as strong as suggested by some previous studies (e.g., Lilleholt 2019).

  9. Note that any domain that is closed with respect to name permutations can be expressed as the union of our simple domains. Our simplification, which is only intended for ease of exposition, will not imply any loss of generality. All results apply to the general framework.

  10. Income lotteries are the lotteries for the IO after a state \((i,\pi )\) is realized.

  11. A case with correlated income-utility occurs when \({\mathscr {D}}=\{y_{\pi }:\pi \in \Pi \}\), \(y_{1}>\cdots >y_{n}\), and, for each \(i\in N\) and each \(\pi \in \Pi\), \(P(i,y_{\pi })>0\) if \(\pi (i)=i\), and \(P(i,y_{\pi })=0\) otherwise.

  12. Karni and Weymark (1998) provide an extension of this theorem to an informationally parsimonious context in which the IO is only assumed to have preferences on the extended lotteries in which there is an equal chance of being any person in society.

  13. See, for instance, Moreno-Ternero and Roemer (2008) and the literature cited therein. More recently, see Grant et al. (2012) or Fleurbaey and Mongin (2016).

  14. See, for instance, Weymark (1991) for an elaborated critique against this interpretation.

  15. See Moreno-Ternero and Roemer (2006), Moreno-Ternero and Roemer (2012) or Chun et al. (2014) for recent instances of the powerful implications of this notion in resource allocation.

  16. We would need to assume the domain is rich enough to admit adding or deleting agents with zero income.

  17. See also Gouveia and Oliver (1996).

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Authors and Affiliations

  1. Department of Economics, Seoul National University, Gwanak-ro 1, Gwanak-gu, Seoul, 151-746, South Korea

    Biung-Ghi Ju

  2. Department of Economics, Universidad Pablo de Olavide, Seville, Spain

    Juan D. Moreno-Ternero

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  1. Biung-Ghi Ju
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  2. Juan D. Moreno-Ternero
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Correspondence to Biung-Ghi Ju.

Additional information

We dedicate this paper to John Weymark, a great scholar, with our sincere thanks. We acknowledge the contributions from two anonymous referees. Financial support from the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2016S1A3A2924944), the Spanish Ministry of Science and Innovation (ECO2017-83069-P) and from the Center for Distributive Justice at Seoul National University is gratefully acknowledged.

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Ju, BG., Moreno-Ternero, J.D. Taxation behind the veil of ignorance. Soc Choice Welf 60, 165–181 (2023). https://doi.org/10.1007/s00355-021-01344-9

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