The Promise of Positive Optimal Taxation: A Generalized Theory Calibrated to Survey Evidence on Normative Preferences Explains Puzzling Features of Policy

by Matthew Weinzierl

Overview — The traditional goal of optimal tax research among economists has been to choose the "right" normative objective for policy and characterize the tax system that best attains it. However, public opinion on the appropriate normative criterion has been seen as beside the point. An alternative goal, pursued in this paper, is to characterize the tax system that best attains the normative objective that prevails in reality. Weinzierl makes three contributions. First, he presents novel survey evidence on the empirical normative preferences of individuals in the United States. The evidence shows that few respondents prefer the conventional Utilitarian policy or the Rawlsian alternative, and a plurality (nearly half) prefer policies that reflect a mixed objective that gives weight to both Utilitarianism and Equal Sacrifice. Second, he generalizes the conventional optimal tax model to accommodate evidence of a mixed objective for taxation. Third, he shows that the empirically-preferred calibration of the generalized theory has remarkable explanatory power as a positive optimal tax model. Taken together, the survey results, theoretical analysis, and calibrated simulations of this paper demonstrate the potential of a positive optimal taxation research agenda. They show that we can rigorously capture empirical evidence on what tax policies individuals find acceptable and, as one might hope, use the resulting model to better understand how actual tax policy is and (arguably) ought to be designed. Key concepts include:

This paper aims toward improving optimal tax policy that would include the diverse criteria for taxes that most people find compelling.
Optimal tax policy, when modified as in this paper, matches remarkably well with several prominent characteristics of existing policy that are puzzling from the perspective of conventional theory but widely endorsed in reality.
Important questions for future research arise from this paper. For example: whose preferences matter for policymaking, how are individual preferences aggregated, and what are the admissible normative criteria.
Moral authority in reality rests not with tax theorists but with voters and policymakers. This paper heeds the advice of Samuelson (1980) that "Basic questions concerning right and wrong goals to be pursued cannot be settled by mere science as such.... The citizenry must ultimately decide such issues."

Author Abstract

At the heart of modern optimal tax research is the assumption that the objective of taxation is Utilitarian. I present new survey evidence that most people disagree with this assumption, preferring tax policies based at least in part on a classic alternative objective: the principle of Equal Sacrifice. I generalize the standard model to accommodate this preference for a mixed objective. Then, I show that optimal policy in this generalized model, calibrated to the survey evidence, quantitatively matches several features of existing tax policy that are incompatible in the conventional model but widely endorsed in reality, including the coexistence of substantial redistribution and limited tagging. Additional implications increase the appeal of these steps toward a positive theory of optimal taxation.