Optimal Second-Best Taxation When Individuals Have Social Preferences

Thomas Aronsson () and Olof Johansson-Stenman ()
Additional contact information
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 973, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: Models where people derive well-being from motives other than material self-interest – including those rooted in status concerns – are surprisingly scarce in the study of optimal redistributive taxation. In fact, despite extensive evidence from experimental research, other-regarding behavior driven by prosocial preferences is more or less absent in this literature. The purpose of the present paper is to start filling this gap by analyzing the implications of prosocial preferences related to equality and efficiency for optimal income taxation. In doing so, we take a broad perspective by examining three well-known models of social preferences developed by Fehr and Schmidt (1999), Bolton and Ockenfels (2000), and Charness and Rabin (2002), respectively. Our contribution is to analyze the implications of these three social preference models for optimal redistributive income taxation based on a discrete version of the Mirrleesian (1971) framework of optimal nonlinear income taxation. We find that social preferences may have a considerable impact on the structure of marginal income taxation, and that interactions between externality correction and redistributive aspects of taxation are likely to play an important role for the optimal tax structure.

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: 59 pages
Date: 2020-04-16
New Economics Papers: this item is included in nep-ltv, nep-pbe, nep-pub and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.usbe.umu.se/ues/ues973.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:umnees:0973

Access Statistics for this paper

More papers in Umeå Economic Studies from Umeå University, Department of Economics Department of Economics, Umeå University, S-901 87 Umeå, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by David Skog ().