Poverty and Savings: Optimal Taxes with Endogenous Discount Factors

Pier-André Bouchard St-Amant and Louis Perrault

Public Finance Review, 2019, vol. 47, issue 5, 828-863

Abstract: Following recent developments linking poverty to present-bias behavior, we conduct an optimal linear taxation analysis where some individuals (called “behaviorals†) have a discount factor that is a function of their disposable income. In the model, endogenous discount factors imply (1) that taxing labor decreases the valuation of savings and (2) that subsidies on savings mitigate for a lower weight being given to future consumption. We perform simulations where the number of behavioral individuals increases and find that resources raised through labor taxation are used to finance saving subsidies rather than an increase of transfers. The prevalence of behaviorals leads to an increase in the labor income tax rate.

Keywords: optimal taxation; redistribution; endogenous preferences; behavioral economics; nonwelfarism (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:47:y:2019:i:5:p:828-863

DOI: 10.1177/1091142119861352

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