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Social versus Individual Work Preferences: Implications for Optimal Income Taxation

Author

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  • Zhiyong An
  • David Coady

Abstract

The benchmark optimal income taxation model of Mirrlees (1971) finds that the optimal marginal income tax rate (MIT) is always non-negative. This paper extends the benchmark model to allow for differences in social and individual work preferences while maintaining its assumption that individuals are rational. The theoretical and simulation analyses show that under this model, when the government places a higher social weight on work than individuals, the optimal MIT schedule is shifted downwards, introducing the possibility for optimal wage subsidies at the bottom of the income distribution. This implies lower revenues, demogrants and overall progressivity. The case for wage subsidies is reinforced when the government places a relatively higher weight on work for low earners. The model also allows for an analysis of the optimal income tax schedule when government places a social value on unpaid non-market work as argued by Atkinson (2009, 2015).

Suggested Citation

  • Zhiyong An & David Coady, 2022. "Social versus Individual Work Preferences: Implications for Optimal Income Taxation," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 78(4), pages 393-421.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2022-0014
    DOI: 10.1628/fa-2022-0014
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    Cited by:

    1. Zhiyong An, 2023. "On the marginal cost of public funds: the implications of charitable giving and warm glow," Fiscal Studies, John Wiley & Sons, vol. 44(3), pages 299-307, September.

    More about this item

    Keywords

    non-welfarist; optimalincometaxation; preferencedifferences; wagesubsidies;
    All these keywords.

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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