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Optimal Policy with Heterogeneous Preferences

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  • Kaplow Louis

    () (Harvard University)

Abstract

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.

Suggested Citation

  • Kaplow Louis, 2008. "Optimal Policy with Heterogeneous Preferences," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-30, September.
  • Handle: RePEc:bpj:bejeap:v:8:y:2008:i:1:n:40
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    References listed on IDEAS

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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. Ebert,Udo, 1988. "Optimal income taxation: On the case of two-dimensional populations," Discussion Paper Serie A 169, University of Bonn, Germany.
    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, pages 413-446.
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    Cited by:

    1. Bastani, Spencer & Blomquist, Sören & Micheletto, Luca, 2010. "Public Provision of Private Goods, Tagging and Optimal Income Taxation with Heterogeneity in Needs," Working Paper Series, Center for Fiscal Studies 2010:14, Uppsala University, Department of Economics.
    2. Golosov, Mikhail & Troshkin, Maxim & Tsyvinski, Aleh & Weinzierl, Matthew, 2013. "Preference heterogeneity and optimal capital income taxation," Journal of Public Economics, Elsevier, pages 160-175.
    3. Lockwood, Benjamin B. & Weinzierl, Matthew, 2015. "De Gustibus non est Taxandum: Heterogeneity in preferences and optimal redistribution," Journal of Public Economics, Elsevier, pages 74-80.
    4. Laurence Jacquet & Dirk Van de Gaer, 2015. "Politiques fiscales optimales pour les bas revenus et principe de compensation," Revue économique, Presses de Sciences-Po, vol. 66(3), pages 579-600.
    5. Stéphane Gauthier & Fanny Henriet, 2015. "Many-Person Ramsey Rule and Nonlinear Income Taxation," Documents de travail du Centre d'Economie de la Sorbonne 15033, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    6. repec:hal:journl:halshs-01164011 is not listed on IDEAS
    7. Louis Kaplow, 2011. "An Optimal Tax System," NBER Working Papers 17214, National Bureau of Economic Research, Inc.
    8. Jacquet, Laurence & Van de Gaer, Dirk, 2011. "A comparison of optimal tax policies when compensation or responsibility matter," Journal of Public Economics, Elsevier, pages 1248-1262.
    9. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," Journal of Economic Perspectives, American Economic Association, pages 147-174.
    10. Benjamin B. Lockwood & Matthew Weinzierl, 2012. "De Gustibus non est Taxandum: Heterogeneity in Preferences and Optimal Redistribution," Harvard Business School Working Papers 12-063, Harvard Business School, revised Sep 2014.
    11. Peter Diamond & Johannes Spinnewijn, 2011. "Capital Income Taxes with Heterogeneous Discount Rates," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 52-76, November.
    12. Gauthier, Stéphane & Laroque, Guy, 2009. "Separability and public finance," Journal of Public Economics, Elsevier, pages 1168-1174.
    13. Bruno Crépon & Marc Ferracci & Grégory Jolivet & Gerard J. van den Berg, 2009. "Active Labor Market Policy Effects in a Dynamic Setting," Journal of the European Economic Association, MIT Press, pages 595-605.
    14. Gauthier, Stéphane & Laroque, Guy, 2009. "Separability and public finance," Journal of Public Economics, Elsevier, pages 1168-1174.
    15. repec:hal:wpaper:halshs-01252563 is not listed on IDEAS
    16. Stéphane Gauthier & Fanny Henriet, 2016. "Consumption taxes and taste heterogeneity," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01252563, HAL.

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