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Adaptation, Anticipation-Bias and Optimal Income Taxation

Thomas Aronsson () and Ronnie Schöb ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Ronnie Schöb: School of Business and Economics, Postal: Freie Universität Berlin, D–14195 Berlin, Germany

Authors registered in the RePEc Author Service: Ronnie Schoeb

No 842, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: Adaptation is omnipresent but people systematically fail to correctly anticipate the degree to which they adapt. This leads individuals to make inefficient intertemporal decisions. This paper concerns optimal income taxation to correct for such anticipation-biases in a framework where consumers adapt to earlier consumption levels through a habit-formation process. The analysis is based on a general equilibrium OLG model with endogenous labor supply and savings where each consumer lives for three periods. Our results show how a paternalistic government may correct for the effects of anticipation-bias through a combination of time-variant marginal labor income taxes and savings subsidies. Furthermore, the optimal policy mix remains the same, irrespective of whether consumers commit to their original life-time plan for work hours and savings decided upon in the first period of life or re-optimize later on when realizing the failure to adapt.

Keywords: Optimal taxation; adaptation; habit-formation; anticipation-bias; paternalism (search for similar items in EconPapers)
JEL-codes: D03 D61 D91 H21 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2012-05-23
New Economics Papers: this item is included in nep-dge and nep-pub
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Adaptation, Anticipation-Bias and Optimal Income Taxation (2012) Downloads
Working Paper: Adaptation, Anticipation-bias and optimal income taxation (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:umnees:0842

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