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Identification of Preferences and Evaluation of Income Tax Policy

  • Charles F. Manski

The merits of alternative income tax policies depend on the population distribution of preferences for income, leisure, and public goods. Standard theory, which supposes that persons want more income and more leisure, does not predict how they resolve the tension between these desires. Empirical studies of labor supply have been numerous but have not shed much light on the matter. A persistent problem is that empirical researchers have imposed strong preference assumptions that lack foundation. This paper examines anew the problem of inference on preferences and considers the implications for comparison of tax policies. I first perform a basic revealed-preference analysis that imposes no assumptions on the preference distribution beyond the presumption that persons prefer more income and leisure. This shows that observation of a person's labor supply under a status quo tax policy may bound his labor supply under a proposed policy or may have no implications, depending on the shapes of the two tax schedules and the location of status quo labor supply. I next explore the identifying power of two assumptions restricting the population distribution of income-leisure preferences. One assumes that groups of persons who face different choice sets have the same distribution of preferences, while the other adds restrictions on the shape of this distribution. I then address utilitarian policy comparison with partial knowledge of preferences. Partial knowledge of preferences implies partial knowledge of the welfare function. Hence, it may not be possible to rank policies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17755.

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Date of creation: Jan 2012
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Publication status: published as “Identification of Income-Leisure Preferences and Evaluation of Income Tax Policy,” Quantitative Economics, Vol. 5, No. 1, 2014, pp. 145-174.
Handle: RePEc:nbr:nberwo:17755
Note: LS PE
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  1. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
  2. Asher A. Blass & Saul Lach & Charles F. Manski, 2008. "Using Elicited Choice Probabilities to Estimate Random Utility Models: Preferences for Electricity Reliability," NBER Working Papers 14451, National Bureau of Economic Research, Inc.
  3. Soren Blomquist & Whitney Newey, 2002. "Nonparametric Estimation with Nonlinear Budget Sets," Econometrica, Econometric Society, vol. 70(6), pages 2455-2480, November.
  4. Richard Blundell & Antoine Bozio & Guy Laroque, 2011. "Extensive and intensive margins of labour supply: working hours in the US, UK and France," IFS Working Papers W11/01, Institute for Fiscal Studies.
  5. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
  6. Richard Blundell & Andrew Shephard, 2008. "Employment, hours of work and the optimal taxation of low income families," IFS Working Papers W08/01, Institute for Fiscal Studies.
  7. Beggs, S. & Cardell, S. & Hausman, J., 1981. "Assessing the potential demand for electric cars," Journal of Econometrics, Elsevier, vol. 17(1), pages 1-19, September.
  8. Keane, Michael & Moffitt, Robert, 1998. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 553-89, August.
  9. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier.
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