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Optimal Policy with Heterogeneous Preferences

Listed author(s):
  • Kaplow Louis

    ()

    (Harvard University)

Registered author(s):

    Optimal policy rulesincluding those regarding income taxation, commodity taxation, public goods, and externalitiesare 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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    File URL: https://www.degruyter.com/view/j/bejeap.2008.8.1/bejeap.2008.8.1.1947/bejeap.2008.8.1.1947.xml?format=INT
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    Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

    Volume (Year): 8 (2008)
    Issue (Month): 1 (September)
    Pages: 1-30

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    Handle: RePEc:bpj:bejeap:v:8:y:2008:i:1:n:40
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    8. Hylland, Aanund & Zeckhauser, Richard, 1979. " Distributional Objectives Should Affect Taxes but not Program Choice or Design," Scandinavian Journal of Economics, Wiley Blackwell, vol. 81(2), pages 264-284.
    9. Tarkiainen, Ritva & Tuomala, Matti, 1999. "Optimal Nonlinear Income Taxation with a Two-Dimensional Population; A Computational Approach," Computational Economics, Springer;Society for Computational Economics, vol. 13(1), pages 1-16, February.
    10. Louis Kaplow & Steven Shavell, 2001. "Any Non-welfarist Method of Policy Assessment Violates the Pareto Principle," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 281-286, April.
    11. Konishi, Hideo, 1995. "A Pareto-improving commodity tax reform under a smooth nonlinear income tax," Journal of Public Economics, Elsevier, vol. 56(3), pages 413-446, March.
    12. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
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