Revealing Inequality Aversion from Tax Policy: The Role of Non-Discrimination

Governments have increasing access to information about individuals, but they exploit little of it in setting taxes. This paper shows how to reveal inequality aversion from observed tax policy when governments restrict the information they exploit. The first contribution is to map governments’ priority on increasing consumption at each income level (marginal welfare weights) into concerns for vertical and horizontal equity. While vertical equity provides the inequality aversion rationale for redistributive taxation, horizontal equity introduces a restriction against tax discrimination based on certain characteristics. Building on the inverse optimal tax problem, I develop a theory and optimal tax algorithm to reveal the priority on each concern. The second contribution is to apply the model to a hypothetical gender tax using Norwegian tax return data. The main result is that inequality aversion is overestimated when horizontal equity is ignored.