Aronsson, Thomas () (Department of Economics, Umeå University) Sjögren, Tomas () (Department of Economics, Umeå University)
Abstract
This paper concerns optimal income taxation in a two-type model extended to allow for social interaction and social norms in the labor market. One type of norm relates to the hours of work among the employed, and we assume that there is a cost associated with deviating from 'normal behavior' (defined in terms of the average hours of work). Another type of norm refers to the pressure of earning one's living by working, where social interaction means that the perceived cost of being out of employment depends on the share of nonworkers in the population. The results show how, and why, the existence of social norms may modify results derived in earlier literature. Under reasonable assumptions, the norm referring to normal behavior in term of work hours provides an incentive for the government to increase the hours of work supplied by the high-ability type relative to the hours of work supplied by the low-ability type, whereas the norm of 'earning one's living by working' strengthens the employment-motive behind tax policy.
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Publisher Info
Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number
672.
Length: 24 pages Date of creation: 13 Mar 2006 Date of revision: Handle: RePEc:hhs:umnees:0672
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Find related papers by JEL classification: D60 - Microeconomics - - Welfare Economics - - - General H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
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