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Optimal Policy with Heterogeneous Preferences

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  • Louis Kaplow

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14170.

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Date of creation: Jul 2008
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Publication status: published as Louis Kaplow, 2008. "Optimal Policy with Heterogeneous Preferences," Advances in Economic Analysis & Policy, Berkeley Electronic Press, vol. 8(1).
Handle: RePEc:nbr:nberwo:14170

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  1. Louis Kaplow, 2006. "Optimal Control of Externalities in the Presence of Income Taxation," NBER Working Papers 12339, National Bureau of Economic Research, Inc.
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  5. Louis Kaplow & Steven Shavell, 2001. "Any Non-welfarist Method of Policy Assessment Violates the Pareto Principle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(2), pages 281-286, April.
  6. Laroque, Guy R., 2005. "Indirect taxation is superfluous under separability and taste homogeneity: a simple proof," Economics Letters, Elsevier, Elsevier, vol. 87(1), pages 141-144, April.
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Cited by:
  1. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," NBER Working Papers 15071, National Bureau of Economic Research, Inc.
  2. L. Jacquet & D. Van De Gaer, 2009. "A comparison of optimal tax policies when compensation or responsibility matter," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 09/615, Ghent University, Faculty of Economics and Business Administration.
  3. Claus Thustrup Kreiner & Nicolaj Verdelin, 2009. "Optimal Provision of Public Goods: A Synthesis," CESifo Working Paper Series 2538, CESifo Group Munich.
  4. Peter Diamond & Johannes Spinnewijn, 2011. "Capital Income Taxes with Heterogeneous Discount Rates," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 3(4), pages 52-76, November.
  5. Ooghe, Erwin & Peichl, Andreas, 2014. "Fair and efficent taxation under partial control," ZEW Discussion Papers 14-002, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Stéphane Gauthier & Guy Laroque, 2008. "Separability and public finance," IFS Working Papers, Institute for Fiscal Studies W08/07, Institute for Fiscal Studies.
  7. 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.
  8. 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.
  9. Louis Kaplow, 2011. "An Optimal Tax System," NBER Working Papers 17214, National Bureau of Economic Research, Inc.

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