Revealed preferences for redistribution and government’s elasticity expectations

Olli Kärkkäinen

No 284, Working Papers from Työn ja talouden tutkimus LABORE, The Labour Institute for Economic Research LABORE

Abstract: This paper examines revealed preferences for redistribution behind the Finnishtax-benefit system in years 1995-2006 using the optimal income taxation frame-work. These implied preferences for redistribution are estimated by solving theredistributive preferences that would make the actual tax-benefit system opti-mal. Revealed preferences for redistribution can be seen as a inequality measurethat takes into account both aspects of the equity-efficiency tradeoff. Whencomparing the redistributive preferences over time a behavioral decompositionmethod is used to separate the mechanical effects due to changes in pre-taxincome from the direct effects of policy changes. Also another dual approach tooptimal income taxation is used in order to estimate the labour supply elasticityexpectations of the government. The results show that the Finnish tax-benefitsystem can be optimal only if the government places a relatively low weight onthe welfare of the working poor. Over a timeperiod when there were severalchanges made to the tax-benefit system that decreased participation tax ratesthere seems to have been a shift of social welfare weight from the unemployed tothe working poor. This shift is mostly due to direct policy changes. There areseveral potential explanations for the change in revealed welfare weights. Oneof them is an actual change in the social preferences for redistribution.

Keywords: Redistribution; inequality; optimal income taxation; social preferences (search for similar items in EconPapers)
JEL-codes: C63 D63 H11 H21 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2013-02-01
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