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Optimal Policy with Heterogeneous Preferences

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  • Kaplow Louis

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    (Harvard University)

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    Abstract

    Optimal policy rules—including those regarding income taxation, commodity taxation, public goods, and externalities—are typically derived in models with homogeneous preferences. This article reconsiders many central results for the case in which preferences for commodities, public goods, and externalities are heterogeneous. When preference differences are observable, standard second-best results in basic settings are unaffected, except those for the optimal income tax. Optimal levels of income taxation may be higher, the same, or lower on types who derive more utility from various goods, depending on the nature of preference differences and the concavity of the social welfare function. When preference differences are unobservable, all policy rules may change. The determinants of even the direction of optimal rule adjustments are many and subtle.

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    Bibliographic Info

    Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

    Volume (Year): 8 (2008)
    Issue (Month): 1 (September)
    Pages: 1-30

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    Handle: RePEc:bpj:bejeap:v:8:y:2008:i:1:n:40

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    Web page: http://www.degruyter.com

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    Cited by:
    1. Mankiw, N. Gregory & Weinzierl, Matthew Charles & Yagan, Danny Ferris, 2009. "Optimal Taxation in Theory and Practice," Scholarly Articles 4263739, Harvard University Department of Economics.
    2. Louis Kaplow, 2011. "An Optimal Tax System," NBER Working Papers 17214, National Bureau of Economic Research, Inc.
    3. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2010. "Public Provision of Private Goods, Tagging and Optimal Income Taxation withHeterogeneity in Needs," CESifo Working Paper Series 3275, CESifo Group Munich.
    4. JACQUET, Laurence & VAN DE GAER, Dirk, . "A comparison of optimal tax policies when compensation or responsibility matter," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2421, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Gauthier, Stéphane & Laroque, Guy, 2009. "Separability and public finance," Journal of Public Economics, Elsevier, Elsevier, vol. 93(11-12), pages 1168-1174, December.
    6. Laurence Jacquet & Dirk Van de gaer, 2013. "Politiques fiscales optimales pour les bas revenus et principe de compensation," THEMA Working Papers 2013-04, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    7. Peter Diamond & Johannes Spinnewijn, 2009. "Capital Income Taxes With Heterogeneous Discount Rates," Working Papers, Center for Retirement Research at Boston College wp2009-14, Center for Retirement Research, revised Jun 2009.

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