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

Abstract

Widely quoted cross-country evidence finds income to be negatively associated with inequality, suggesting the absence of a trade-off between efficiency and equity. Such evidence implicitly assumes that all countries are at the frontier in an efficiency-equity space. We refute this for most OECD countries, and find a best-practice frontier displaying a trade-off. In accordance with standard economic theory, a larger tax burden is associated with lower efficiency and more equity. Interestingly, the trade-off has not become steeper over the sample period 1970-2014. Country positions differ significantly with some being consistently at the frontier, while others are well inside the opportunity set.