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Optimal taxation when people do not maximize well-being

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  • Gerritsen, Aart

Abstract

I derive the optimal nonlinear income tax when individuals do not necessarily maximize their own well-being. This generates a corrective argument for taxation: optimal marginal taxes are higher (lower) if individuals work too much (too little) from a well-being point of view. I allow for multidimensional heterogeneity and derive the optimal tax schedule in terms of measurable sufficient statistics. One of these statistics measures the degree to which individuals fail to optimize their labor supply. I empirically estimate this by using British life satisfaction data as a measure of well-being. I find that low-income workers tend to work ‘too little’ and high-income workers ‘too much,’ providing a motive for lower marginal tax rates at the bottom and higher marginal tax rates at the top of the income distribution.

Suggested Citation

  • Gerritsen, Aart, 2016. "Optimal taxation when people do not maximize well-being," Journal of Public Economics, Elsevier, vol. 144(C), pages 122-139.
  • Handle: RePEc:eee:pubeco:v:144:y:2016:i:c:p:122-139
    DOI: 10.1016/j.jpubeco.2016.10.006
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    3. Erwin Ooghe, 2020. "Conditional Earnings Subsidies for Low Earners," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(2), pages 524-552, April.
    4. Paukkeri, Tuuli, 2018. "Essays on public economics," Research Reports P72, VATT Institute for Economic Research.
    5. Ravi Kanbur & Tuuli Paukkeri & Jukka Pirttilä & Matti Tuomala, 2018. "Optimal taxation and public provision for poverty reduction," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(1), pages 64-98, February.
    6. Akay, Alpaslan & Bargain, Olivier B. & Jara, H. Xavier, 2017. "Back to Bentham, Should We? Large-Scale Comparison of Experienced versus Decision Utility," GLO Discussion Paper Series 52, Global Labor Organization (GLO).
    7. Ng, Yew-Kwang, 2018. "Ten rules for public economic policy," Economic Analysis and Policy, Elsevier, vol. 58(C), pages 32-42.
    8. Weber, Matthias, 2019. "Behavioral Optimal Taxation: The Case of Aspirations," SocArXiv fpnw6, Center for Open Science.
    9. Matilde Giaccherini & David Herberich & David Jimenez-Gomez & John List & Giovanni Ponti & Michael Price, 2020. "Are Economics and Psychology Complements in Household Technology Diffusion? Evidence from a Natural Field Experiment," Natural Field Experiments 00713, The Field Experiments Website.
    10. Alex Rees-Jones & Dmitry Taubinsky, 2018. "Taxing Humans: Pitfalls of the Mechanism Design Approach and Potential Resolutions," Tax Policy and the Economy, University of Chicago Press, vol. 32(1), pages 107-133.
    11. Robin Jessen & Maria Metzing & Davud Rostam-Afschar, 2017. "Optimal Taxation under Different Concepts of Justness," SOEPpapers on Multidisciplinary Panel Data Research 953, DIW Berlin, The German Socio-Economic Panel (SOEP).
    12. Henk-Wim de Boer & Egbert Jongen & Patrick Koot, 2018. "Optimal Taxation of Secondary Earners in the Netherlands: Has Equity Lost Ground?," CPB Discussion Paper 375, CPB Netherlands Bureau for Economic Policy Analysis.
    13. Jacobs, Bas & Jongen, Egbert L.W. & Zoutman, Floris T., 2017. "Revealed social preferences of Dutch political parties," Journal of Public Economics, Elsevier, vol. 156(C), pages 81-100.
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    15. Aart Gerritsen & Bas Jacobs & Alexandra Victoria Rusu & Kevin Spiritus, 2020. "Optimal Taxation of Capital Income with Heterogeneous Rates of Return," CESifo Working Paper Series 8395, CESifo.

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    More about this item

    Keywords

    Optimal taxation; Corrective taxation; Subjective well-being;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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