This paper examines the optimal non linear income and commodity tax when the same labor disutility can receive two alternative interpretations, taste for leisure and disability, but the disability is not readily observable. We compare the optimal policyunder alternative social objectives, welfarist and non-welfarist, and conclude that the non-welfarist objective, in which the planner gives a higher weight to the disutility of labour of the disabled individuals, is the only reasonable specification. It has some foundation in the theory of responsability; further, unlike the other specifications it yields an optimal solution that may involve a lower labour supply requirement from disabled individuals.
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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number
2007035.