Dalton-improving tax reform: When households differ in ability and needs

In a previous paper we suggested a method for identifying tax reforms that adhere to Dalton's principle of transfers, approving a small enough transfer from 'rich' to 'poor'. However, even the weak requirement from that method, namely prescribing a uni-dimensional ordinal ranking of households by how deserving they are of a marginal income transfer, is confining. Here we extend the approach by formulating a two-dimensional criterion for a Dalton-improving tax reform, when there is social approval for transfers (when other things are equal) from the more able to the less able, and from less needy households to more needy ones. The possibility of applying this extended criterion in practice, and a comparison with other criteria, is carried out using the example of U.K. excise taxes.