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Does a work effort norm lead to more efficient taxation in majority voting?

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  • Weinreich, Daniel
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    Abstract

    This paper introduces a work effort norm into a three-type ability approach to optimal linear income taxation. According to this social norm type, individuals experience stigma when working more or less than the average. This leads to a smaller dispersion in labor supply. The individual work incentives then induce post-tax income inequality to rise. Based on this, it can be shown that the socially optimal tax rate is unambiguously increasing with the strength of the work effort norm. Turning to majority voting the tax rate preferred by the median voter could decrease when the work effort norm is introduced. We can show that the majority tax rate turns out to be inefficiently low or high. Beyond, for large preference parameters the difference between the first-best tax rate and the majority tax rate seems to diminish. Further, for specific wage distributions there seem to exist a preference strength which ensures efficient taxation. Subsequently, the work effort norm can reduce the inefficiency implemented by majority voting.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48913.

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    Date of creation: Aug 2013
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    Handle: RePEc:pra:mprapa:48913

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    Keywords: optimal income taxation; majority voting work effort norm; labor supply; redistribution;

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    1. Traxler, Christian, 2006. "Social Norms and Conditional Cooperative Taxpayers," Discussion Papers in Economics, University of Munich, Department of Economics 1202, University of Munich, Department of Economics.
    2. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, Elsevier, vol. 8(3), pages 329-340, December.
    3. Hans-Werner Sinn, 1995. "Social Insurance, Incentives, and Risk Taking," NBER Working Papers 5335, National Bureau of Economic Research, Inc.
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    5. Harms, Philipp & Zink, Stefan, 2003. "Limits to redistribution in a democracy: a survey," European Journal of Political Economy, Elsevier, Elsevier, vol. 19(4), pages 651-668, November.
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    7. Tridimas, George & Winer, Stanley L., 2005. "The political economy of government size," European Journal of Political Economy, Elsevier, Elsevier, vol. 21(3), pages 643-666, September.
    8. Lindbeck, Assar & Nyberg, Sten & Weibull, Jörgen W., 1997. "Social Norms and Economic Incentives in the Welfare State," Working Paper Series, Research Institute of Industrial Economics 476, Research Institute of Industrial Economics.
    9. Lindbeck, Assar, 1995. "Hazardous Welfare-State Dynamics," Working Paper Series, Research Institute of Industrial Economics 428, Research Institute of Industrial Economics.
    10. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, Elsevier, vol. 14(1), pages 49-68, August.
    11. Thomas Eichner & Andreas Wagener, 2004. "The Welfare State in a Changing Environment," International Tax and Public Finance, Springer, Springer, vol. 11(3), pages 313-331, 05.
    12. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, Elsevier, vol. 17(2), pages 181-211, March.
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