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Optimal Income Taxation and Social Norms in the Labor Market

  • Aronsson, Thomas

    ()

    (Department of Economics, Umeå University)

  • Sjögren, Tomas

    ()

    (Department of Economics, Umeå University)

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    This paper concerns optimal income taxation in a two-type model extended to allow for social interaction and social norms in the labor market. One type of norm relates to the hours of work among the employed, and we assume that there is a cost associated with deviating from 'normal behavior' (defined in terms of the average hours of work). Another type of norm refers to the pressure of earning one's living by working, where social interaction means that the perceived cost of being out of employment depends on the share of nonworkers in the population. The results show how, and why, the existence of social norms may modify results derived in earlier literature. Under reasonable assumptions, the norm referring to normal behavior in term of work hours provides an incentive for the government to increase the hours of work supplied by the high-ability type relative to the hours of work supplied by the low-ability type, whereas the norm of 'earning one's living by working' strengthens the employment-motive behind tax policy.

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    File URL: http://www.econ.umu.se/DownloadAsset.action?contentId=52412&languageId=3&assetKey=ues672
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    Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 672.

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    Length: 24 pages
    Date of creation: 13 Mar 2006
    Date of revision:
    Handle: RePEc:hhs:umnees:0672
    Contact details of provider: Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
    Phone: 090 - 786 61 42
    Fax: 090 - 77 23 02
    Web page: http://www.econ.umu.se/
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    1. Blomquist, N.S., 1991. "Interdependent Behavio and the Effect of Taxes," Papers 1991f, Uppsala - Working Paper Series.
    2. Assar Lindbeck & Sten Nyberg & Jörg Weibull, 2003. "Social Norms and Welfare State Dynamics," CESifo Working Paper Series 931, CESifo Group Munich.
    3. Aronsson, T. & Blomquist, N.S. & Sacklen, H., 1992. "How to Identify Interdependence Behavior in an Empirical Model of Labor Supply," Papers 1992-5, Uppsala - Working Paper Series.
    4. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
    5. Jakee, Keith & Sun, Guang-Zhen, 2005. "External habit formation and dependency in the welfare state," European Journal of Political Economy, Elsevier, vol. 21(1), pages 83-98, March.
    6. Lindbeck, A., 1994. "Welfare State Disincentives with Endogenous Habits and Norms," Papers 589, Stockholm - International Economic Studies.
    7. Assar Lindbeck & Sten Nyberg & Jšrgen W. Weibull, 1999. "Social Norms And Economic Incentives In The Welfare State," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 1-35, February.
    8. Clemens Fuest & Bernd Huber, 1997. "Wage bargaining, labor-tax progression, and welfare," Journal of Economics, Springer, vol. 66(2), pages 127-150, June.
    9. Woittiez, Isolde & Kapteyn, Arie, 1998. "Social interactions and habit formation in a model of female labour supply," Journal of Public Economics, Elsevier, vol. 70(2), pages 185-205, November.
    10. Aronsson, Thomas & Sjögren, Tomas, 2002. "Is the Optimal Labor Income Tax Progressive in a Unionized Economy?," Umeå Economic Studies 587, Umeå University, Department of Economics.
    11. Ronald Wendner, 2004. "Frames of reference, the environment, and efficient taxation," Economics of Governance, Springer, vol. 6(1), pages 13-31, January.
    12. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March.
    13. Annegrete Bruvoll & Karine Nyborg, 2004. "The Cold Shiver of Not Giving Enough: On the Social Cost of Recycling Campaigns," Land Economics, University of Wisconsin Press, vol. 80(4).
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