The Economic Journal vol:125 issue:589 pages:2024-2051
We study fair and efficient tax–benefit schemes based on income and non-income factors under partial control. Partial control means that each factor is a specific mixture of unobserved ability (randomly drawn by nature) and effort (chosen by individuals who differ in tastes). Factors differ in the degree of control, ranging from no control (only ability matters) to full control (only effort matters). Fairness requires compensating individuals for differences in abilities but not for differences in tastes. We discuss the general properties of fair and efficient taxation and study two special cases – income taxation and tagging – in detail.