What is a fair income tax model?

The project ‘On the ethical justification of various income tax models’, run by the Department of Social Psychology at the University of Hamburg, is addressing this set of questions. The project ran in 2006.

Which principles of income taxation are perceived by the public as fair?

One way of gauging the quality of a society is by looking at how it shares and distributes its resources. In this context, income tax models – alongside concepts relating to excise duty – are of particular importance because they contribute significantly to government revenue and regularly spark debate about the acceptable, permissible and necessary burden placed on the individual.

Taking American and Scandinavian tax models as exemplary points of reference, various methods will be used to identify characteristics of a tax system perceived as fair. These investigations into the ethical foundations of various income tax models will be carried out during 2006 and are divided into four sub-areas.

How are the exemptions in the current Income Tax Act justified?

The first project begins with an analysis of the status quo of income tax legislation by examining the exemptions under which taxpayers are either not taxed at all or are taxed at a lower rate. Such exemptions have not been included in tax legislation without reason, but are based on normative premises. The legislature’s reasoning is to be classified, through content analysis, according to the four basic ethical positions (hedonistic, utilitarian, deontological, intuitive) and the three principles of justice (contribution, need, equality). This will clarify which considerations regarding tax justice underpin the legislation.

What characteristics should income tax laws include?

The second project involves identifying the features of income tax collection that are perceived as important and fair. In evaluating these assessments of fairness, particular attention will be paid to socio-economic criteria (age, gender, income, level of education, unemployment, federal state). To this end, a questionnaire survey and a further twenty structured interviews with tax advisers are planned; these advisers are to identify, from an expert perspective, the features of income tax that should be classified as important and fair.

What should the marginal tax rate be?

A third study focuses on the marginal tax rate perceived as fair. In this study, the focus is not on examining the substance of income tax models – such as a flat tax – but on analysing the impact of specific tax rates – albeit resulting from varying models – on taxpayers’ perception of fairness. A scenario-based approach will be used. In addition, a large-scale survey is being carried out.

What level of taxation are people prepared to pay to maintain a state?

The fourth sub-study aims to experimentally examine the extent to which people are prepared to pay taxes for the benefit of a community. To this end, a ‘tax game’ is being developed based on a social dilemma involving negative utility (costs in the form of taxes). As in a social dilemma, none of the participants knows how the other players will behave or whether they will prioritise their individual gain or the common good. The state will only survive in the tax game if it has sufficient revenue.