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Optimal Taxation with Behavioral Agents

Xavier Gabaix and Emmanuel Farhi ()

No 1634, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops a theory of optimal taxation with behavioral agents. We use a general behavioral framework that encompasses a wide range of behavioral biases such as misperceptions, internalities and mental accounting. We revisit the three pillars of optimal taxation: Ramsey (linear commodity taxation to raise revenues and redistribute), Pigou (linear commodity taxation to correct externalities) and Mirrlees (nonlinear income taxation). We show how the canonical optimal tax formulas are modified and lead to a rich set of novel economic insights. We also show how to incorporate nudges in the optimal taxation frameworks, and jointly characterize optimal taxes and nudges. We explore the Diamond-Mirrlees productive efficiency result and the Atkinson-Stiglitz uniform commodity taxation proposition, and find that they are more likely to fail with behavioral agents.

New Economics Papers: this item is included in nep-mic and nep-pbe
Date: 2017
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https://economicdynamics.org/meetpapers/2017/paper_1634.pdf (application/pdf)

Related works:
Working Paper: Optimal Taxation with Behavioral Agents (2015) Downloads
Working Paper: Optimal Taxation with Behavioral Agents (2015) Downloads
Working Paper: Optimal Taxation with Behavioral Agents (2015) Downloads
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More papers in 2017 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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