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Optimal Policy with Heterogeneous Preferences

  • Louis Kaplow

Optimal policy rules--including those regarding income taxation, commodity taxation, public goods, and externalities--are 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: http://www.nber.org/papers/w14170.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14170.

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Date of creation: Jul 2008
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Publication status: published as Louis Kaplow, 2008. "Optimal Policy with Heterogeneous Preferences," Advances in Economic Analysis & Policy, Berkeley Electronic Press, vol. 8(1).
Handle: RePEc:nbr:nberwo:14170
Note: EEE LE PE
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  10. Kaplow, Louis, 2006. "On the undesirability of commodity taxation even when income taxation is not optimal," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1235-1250, August.
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  17. 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 264-84.
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  19. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309.
  20. Kaplow, Louis, 2006. "Public goods and the distribution of income," European Economic Review, Elsevier, vol. 50(7), pages 1627-1660, October.
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  23. 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.
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