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Taxation and Heterogeneous Preferences

Listed author(s):
  • Blomquist, Sören

    ()

    (Department of Economics)

  • Christiansen, Vidar

    ()

    (Department of Economics)

Non-linear income taxes and linear commodity taxes are analysed when people differ with respect to ability, high-skilled agents have heterogeneous preferences, and neither individual abilities nor preferences are observable. The paper highlights how informational constraints may motivate differential treatment of people with different preferences for leisure even if unequal treatment is not desirable per se. Which preference type that will be better or worse off, is shown to depend on the self-selection constraints associated with the information asymmetry. We characterize pure income tax optima, which may be bunching or separating optima. In particular, the income tax may not be able to distinguish between those low-income people who are low-skilled and those who have strong preference for leisure. As is shown, there may still be an impact on the optimum income tax schedule as it will depend on the composition of the population with respect to types of individuals. Finally, the paper addresses what can be achieved by commodity taxes when preferences are heterogeneous, in particular, in terms of targeting groups that the income tax is incapable of discriminating between.

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File URL: http://www.nek.uu.se/pdf/wp2004_9.pdf
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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2004:9.

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Length: 29 pages
Date of creation: 07 Jul 2004
Handle: RePEc:hhs:uunewp:2004_009
Contact details of provider: Postal:
Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden

Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
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