Fairness gaps for earnings tax design

Erwin Ooghe - KU Leuven

In a setting with skill and preference heterogeneity, we characterize a family of social welfare measures that aggregate fairness gaps, defined as the difference between the money-metric utilities that individuals have and the money-metric utilities they should have in a fair society. Each welfare measure can be decomposed into government revenues - size, excess burden - inefficiency, and unfair inequality - inequity. As a proof of concept, we evaluate four hypothetical earnings tax reforms based on two normative parameters: the degree of unfairness aversion and the degree of compensation for productive skills.