Tax Salience: The Equality-Honesty-Efficiency Tradeoff

• In Event: Social Objectives in Optimal Taxation

Abstract

A key tradeoff in taxation is that between equality and efficiency. This trade-off can be eased if it is possible to exploit less salient taxes, i.e., those to which taxpayers pay less attention. However, a deliberate choice to use less salient taxes might be regarded as dishonest. This implies a three-way trade-off between equality, efficiency and honesty. We analyze this tradeoff in the simple setting of a linear income tax, using a multi-criterion objective. Honesty always comes at a cost to utilitarian welfare, and eliminating all dishonesty is Pareto inefficient. Utilitarian welfare can be decomposed into equality and efficiency, and honesty must always come at a cost to one of these. In our model, there is an especially stark conflict between honesty and equality: A higher bar for honestly always implies more inequality at the optimum, while efficiency may increase or decrease. The approach taken in this paper could also be applied to other situations where both utilitarian and broader ethical considerations are at play.

Authors

• Itai Sher, University of Massachusetts Amherst

• Ashley Craig, Australian National University