Optimal Income Taxation and Social Norms in the Labor Market

Thomas Aronsson () and Tomas Sjögren ()
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Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Tomas Sjögren: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

No 672, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: 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.

Keywords: Optimal Taxation; Social Interaction; Norms (search for similar items in EconPapers)
JEL-codes: D60 H21 H53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-soc
Date: 2006-03-13
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