Tax structure and government expenditures with tax equity concerns

We augment a standard tax model by concerns about equity: people get upset when labour is taxed more heavily than capital. Even the slighest concern for tax equity invalidates the common tenet that capital remains tax-exempt in small open economies. This holds for exogenous as well ass for endogenous government expenditures and irrespective of whether concerns with tax equity get more intense, the economy may choose higher taxes on labour and move to the downward sloped part of its laffer curve. For endogenous government spending, stronger concerns with tax equity may lead to a larger size of the public sector.