Optimal Taxation and Other-Regarding Preferences

Thomas Aronsson () and Olof Johansson-Stenman
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Thomas Aronsson: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden, https://www.umu.se/handelshogskolan
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, University of Gothenburg

No 1016, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: The present paper analyzes optimal redistributive income taxation in a Mirrleesian framework extended with other-regarding preferences at the individual level. We start by developing a general model where the other-regarding preference component of the utility functions is formulated to encompass almost any form of preferences for other people’s disposable income, and then continue with four prominent special cases. Two of these reflect self-centered inequality aversion, based on Fehr and Schmidt (1999) and Bolton and Ockenfels (2000), whereas the other two reflect non-self-centered inequality aversion, where people have preferences for a low Gini coefficient and a high minimum income level in society, respectively. We find that other-regarding preferences may substantially increase the marginal tax rates, including the top rates, and that different types of other-regarding preferences have very different implications for optimal taxation.

Keywords: Optimal Taxation; Redistribution; Social Preferences; Inequality Aversion (search for similar items in EconPapers)
JEL-codes: D62 D90 H21 H23 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2023-10-19
New Economics Papers: this item is included in nep-ltv, nep-mic, nep-pbe, nep-pub and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:umnees:1016

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