Working Paper Series, Department of Economics, Uppsala University
No 2004:9:
Taxation and Heterogeneous Preferences
Sören Blomquist ()
and Vidar Christiansen ()
Abstract: Non-linear income taxes and linear commodity taxes are
analysed when people differ with respect to ability, high-skilled agents
have heterogeneous preferences, and neither individual abilities nor
preferences are observable. The paper highlights how informational
constraints may motivate differential treatment of people with different
preferences for leisure even if unequal treatment is not desirable per se.
Which preference type that will be better or worse off, is shown to depend
on the self-selection constraints associated with the information
asymmetry. We characterize pure income tax optima, which may be bunching or
separating optima. In particular, the income tax may not be able to
distinguish between those low-income people who are low-skilled and those
who have strong preference for leisure. As is shown, there may still be an
impact on the optimum income tax schedule as it will depend on the
composition of the population with respect to types of individuals.
Finally, the paper addresses what can be achieved by commodity taxes when
preferences are heterogeneous, in particular, in terms of targeting groups
that the income tax is incapable of discriminating between.
Keywords: Optimum taxation; Heterogeneous preferences; Asymmetric information; (follow links to similar papers)
JEL-Codes: H21; H23; (follow links to similar papers)
29 pages, July 7, 2004
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