Towards Equity and Efficiency in Partnership Allocations

The primary goal of any tax system is to raise sufficient revenue for government. More precisely, taxation is the means by which government supplies necessary things not available from the private market. Taxation allows society to cure distributional imperfections in the market. It is appropriate, therefore, only to the extent that the market cannot provide goods and services for which there is public demand; if private markets equitably supplied food, shelter, health care, education, and common defense, taxes could be greatly reduced if not completely eliminated. The revenue raising goal is thwarted to the extent the taxing system is either inefficient or inequitable. Inefficiency decreases gross national product' and inequity spurs resentment and avoidance. Both consequences - inefficiency and inequity - interfere with the market's ability to supply goods and services and have the perverse effect of provoking more tax levies. The two secondary concerns - efficiency and equity - need not be mutually exclusive, though it is sometimes argued that the pursuit of equity decreases efficiency and vice versa.' Progressive taxation seems inequitable because it imposes disparate nominal burdens on taxpayers. One explanation, of course, is that the marginal utility of each dollar is greater to lower earners than to higher earners. The nominally higher extraction from higher earners is equal to the nominally lower extraction from lower earners. Equity is thereby preserved or attained and, assuming progressive rates are set at optimal levels, the tax system should nevertheless achieve its revenue raising goal.