Revealing Inequality Aversion from Tax Policy
Governments have increasing access to information about individuals, but they exploit little of it in setting taxes. This paper shows how to reveal inequality aversion from observed tax policy when governments restrict the information they exploit. The first contribution is to map social marginal welfare weights into the concerns for vertical and horizontal equity.
While vertical equity provides the standard inequality aversion rationale for redistributive taxation, horizontal equity introduces a restriction against tax discrimination based on certain characteristics. Building on the inverse optimal tax problem, I develop a theory and optimal tax algorithm to reveal the priority on each concern. The second contribution is to apply the model to gender taxation in Norway and estimate the necessary statistics. The main result is that inequality aversion is overestimated if horizontal equity is ignored, and by as much as 30 percent in the application.