DP11189 The big trade-off between efficiency and equity - is it there?

Author(s): Torben M Andersen, Jonas Maibom
Publication Date: March 2016
Keyword(s): efficiency, equity, trade-off.
JEL(s): D61, D63, E02, H2
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11189

Widely quoted cross-country evidence finds income to be negatively associated with inequality, which suggests that there is no trade-off between efficiency and equity. Such inference presumes that countries are at the frontier in the efficiency-equity space. We refute this for most OECD countries, and find that the best-practice frontier displays a trade-off. In accordance with standard economic theory, a larger tax burden is associated with lower efficiency and more equity. Interestingly, there is no evidence that the trade-off has become steeper over the sample period 1980-2010. Country positions differ significantly with some being consistently at or close to the frontier, while others are well inside the opportunity set.