Deakin University

Optimal Redistribution with Heterogeneous Preferences for Leisure

Email address: racioner@deakin.edu.au

Keywords: Optimal income taxation, quasi-linear preferences, asymmetric information

JEL Classifications: H21, H41

Abstract:
This paper examines the properties of the optimal nonlinear income tax when preferences are quasilinear in leisure and heterogeneous. Individuals differ in their ability and in their preferences for leisure. The government seeks to redistribute income. It can perfectly observe the level of endogenous income but cannot observe ability or preferences. The heterogeneity of preferences leads to problems of comparability between individual utilities that challenge the design of redistributive schemes. We consider social welfare functions with varying cardinalization of utilities. In particular, we analyze the consequences of adopting a utilitarian social welfare function where the government is allowed to give different weights to individuals with different preferences. Under this particular social objective and given the quasilinearity of preferences, we are able to obtain closed-form solutions for the marginal tax rates and to examine the progressivity of the tax system according to the weights used.

PDF file of paper: racionero.pdf

Session: Income Distributions and Inequality

Time: Friday, 6 July, 8:45am - 10:15am

Room: E