Abstract
We study the implications of procedural fairness on income taxation. All taxation schemes areallowed for, up to the constraints implied by incentive compatibility and budget balance. Weformulate procedural fairness as a particular non-cooperative bargaining game and examine thestationary subgame perfect equilibria of the game. The equilibrium outcome is called taxequilibrium and is shown to be unique. Procedurally fair taxation schemes are defined as thetaxation schemes that result in the limit of tax equilibria when the probability that negotiationsbreak down converges to zero. The procedurally fair taxation scheme is shown to be unique. It isshown to correspond to the taxation scheme resulting from the Nash bargaining solution and leadsto full redistribution of income.
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