Optimal Tax Theory as a Theory of Distributive Justice

Abstract

The literature on taxation and transfers primarily relies on two theories of distributive justice: resource egalitarianism and welfarism, as elaborated through optimal tax theory.In recent years, optimal tax theory has garnered even greater prominence. But nonwelfarists argue it fails to address a number of serious philosophical objections.

This article considers the primary critiques of optimal tax theory, especially by resource egalitarians. It argues the gap between these two theories is narrower than most appreciate. Indeed, once one focuses on egalitarian optimal tax theory and reads that literature broadly, the ideal policy design principles implied by each theory largely mimic the other.

In addition, this article explores how both theories have dealt with concerns that they respond inadequately to preferences to help or harm others, hold individuals unduly responsible for their choices, or fail to account for real world social dynamics and human behavior. It argues that egalitarian optimal tax theory has responded—or, as laid out here, could respond—more effectively to these objections than resource egalitarianism.Specifically, optimal tax theory should adopt three innovations: (1) applying welfare-weighted Pigouvian taxes and subsidies to other-regarding preferences, (2) modeling the optimal endowment tax as one that is risk-neutral and only partially based on ex ante potential income, and (3) treating choices as providing less information about well-being when they are further in the past or relatively predictable.

More explicitly and consistently adopting these assumptions and modeling approaches would clarify that egalitarian optimal tax theory does not entail the extreme limits on autonomy, and unrelenting responsibility for prior choices, that have troubled nonwelfarists.Instead, the focus of egalitarian optimal tax theory would move toward sequalizing outcomes, and away from equalizing ex ante endowments.

Keywords: distributive justice, optimal tax theory, resource egalitarianism, luck egalitarianism, welfarism, public finance, externalities, weighted beneficence

JEL Classification: H21, H22, H23, H30, K34