Social Preferences, Perceived Fairness of Local Tax Regimes and the Demand for Redistribution: An Experimental Study

This research seeks to understand the extent to which social preferences - which include perceptions of fairness as well as equality and efficiency concerns - drive demand for redistribution. Three key sources of demand for redistribution were identified as (i) income maximisation, (ii) risk aversion and (iii) social preferences. A modified Charness and Rabin (2002) utility function was implemented to model these. Hypotheses were derived from a combination of literature evidence and predictions from the model. An experiment was then designed to test hypotheses and results were used to estimate utility weights of each determinant of demand for redistribution. Subjects were split into groups and chose their preferred rate of taxation under a variety of scenarios including their level of involvement, the certainty of their pre-tax income, the source of inequality and the level of dead-weight loss. To extend understanding on the influence of perceptions of fairness on demand for redistribution, the influence of perceptions of procedural and distributive fairness of local tax regimes was also assessed to address a gap in the literature. It was found that social preferences play a key role in driving demand for redistribution. Subjects opted for lower taxation under efficiency losses and when inequality was determined due to luck (random draw) as opposed to level of productivity (performance in a quiz). Additionally, subjects who opted for high redistribution when unaffected by their tax decision also opted for high redistribution when their income was known, when their tax decision affected them and when they were awarded the highest possible level of pre-tax income. This indicated that concerns for equality were present in the sample. However, an attempt to observe the role of perceived procedural and distributive fairness of local tax regimes on demand for redistribution yielded inconclusive results. A gap in the literature therefore remains surrounding the influence of perceptions of procedural fairness and its influence on demand for redistribution. Finally, an attempt to model the relative importance of determinants of demand for redistribution and therefore the extent of social preferences, was unsuccessful. However, results indicated that subjects cared positively about incomes of the poorest member of their group and therefore also possessed genuine social concerns.