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Taxation and Heterogeneous Preferences

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  • Sören Blomquist
  • Vidar Christiansen

Abstract

Non-linear income taxes and linear commodity taxes are analysed when people differ with respect to ability, high-skilled agents have heterogeneous preferences, and neither individual abilities nor preferences are observable. The paper highlights how informational constraints may motivate differential treatment of people with different preferences for leisure even if unequal treatment is not desirable per se. Which preference type will be better or worse off is shown to depend on the self-selection constraints associated with the information asymmetry. We characterize pure income tax optima, which may be bunching or separating optima. In particular, the income tax may not be able to distinguish between those low-income people who are low-skilled and those who have strong preference for leisure. As is shown, there may still be an impact on the optimum income tax schedule as it will depend on the composition of the population with respect to types of individuals. Finally, the paper addresses what can be achieved by commodity taxes when preferences are heterogeneous, in particular, in terms of targeting groups that the income tax is incapable of discriminating between.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1244.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1244

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Keywords: optimum taxation; heterogeneous preferences; asymmetric information.;

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References

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Citations

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Cited by:
  1. Peter Diamond & Johannes Spinnewijn, 2009. "Capital Income Taxes With Heterogeneous Discount Rates," Working Papers, Center for Retirement Research at Boston College, Center for Retirement Research wp2009-14, Center for Retirement Research, revised Jun 2009.
  2. Jacobs, Bas & Schindler, Dirk, 2012. "On the desirability of taxing capital income in optimal social insurance," Journal of Public Economics, Elsevier, Elsevier, vol. 96(9-10), pages 853-868.
  3. Bastani, Spencer & Blomquist, Sören & Micheletto, Luca, 2010. "Public Provision of Private Goods, Tagging and Optimal Income Taxation with Heterogeneity in Needs," Working Paper Series, Center for Fiscal Studies, Uppsala University, Department of Economics 2010:14, Uppsala University, Department of Economics.
  4. Matti Tuomala & Sanna Tenhunen, 2013. "On the design of an optimal non-linear tax/pension system with habit formation," International Tax and Public Finance, Springer, Springer, vol. 20(3), pages 485-512, June.
  5. Marc Fleurbaey, 2005. "Is Commodity Taxation Unfair?," IDEP Working Papers, Institut d'economie publique (IDEP), Marseille, France 0502, Institut d'economie publique (IDEP), Marseille, France, revised Jan 2005.
  6. Jukka Pirttilä & Sanna Tenhunen, 2008. "Pawns and queens revisited: public provision of private goods when individuals make mistakes," International Tax and Public Finance, Springer, Springer, vol. 15(5), pages 599-619, October.
  7. Matteo Bassi, 2012. "Optimal Libertarian Sin Taxes," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 317, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  8. DAUBANES, Julien & LASSERRE, Pierre, 2011. "Optimum Commodity Taxation with a Non-Renewable Resource," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 03-2011, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  9. Hodler, Roland, 2008. "Leisure and redistribution," European Journal of Political Economy, Elsevier, Elsevier, vol. 24(2), pages 354-363, June.
  10. Alan Krause, 2012. "Optimal Savings Taxation when Individuals have Different CRRA Utility Functions," Discussion Papers, Department of Economics, University of York 12/13, Department of Economics, University of York.

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