Lindahl meets Rawls: Benefit-based taxation behind veils of ignorance

• In Event: Social Objectives in Optimal Taxation

Abstract

We generalize Lindahl's benefit-based approach to optimal taxation, in which each individual chooses a preferred level of public spending given their share of the taxes required to fund it, by allowing those individuals to adopt different assumptions about who they are when making that choice. In a standard Lindahl setting, each individual knows everything about themselves. But Rawls (and, in a related way, Harsanyi) asks individuals to choose policy under a veil of ignorance, unaware of their own characteristics. We allow Lindahl’s individuals to choose policy behind such a Rawlsian veil and vary the level of information that veil obscures. When individuals adopt full ignorance about their income-earning abilities, the objective of standard welfarist optimal tax theory emerges organically, with no central planner required to impose it. Put another way, we show that a single principle — benefit-based taxation — can generate normative objectives for public finance that have previously seemed irreconcilable. This framing also highlights a puzzle: prevailing tax policies suggest that individuals are increasingly willing to "step behind the veil" as jurisdictional scale grows — from locality to state to nation — up to but not beyond the national level.

Author

• Matthew Weinzierl, Harvard Business School