Optimal Policy with Heterogeneous Preferences

Abstract

Optimal policy rules-including those regarding income taxation, commodity taxation, public goods, and externalities-are typically derived in models with homogeneous preferences. This article reconsiders many central results for the case in which preferences for commodities, public goods, and externalities are heterogeneous. When preference differences are observable, standard second-best results in basic settings are unaffected, except those for the optimal income tax. Optimal levels of income taxation may be higher, the same, or lower on types who derive more utility from various goods, depending on the nature of preference differences and the concavity of the social welfare function. When preference differences are unobservable, all policy rules may change. The determinants of even the direction of optimal rule adjustments are many and subtle.

Tax Policy with Heterogeneous Agents, Corruption and Tax Evasion in Developing Countries : case of Cameroon

“…Taking into account the heterogeneity of income tax, commodity tax, public goods and externalities Kaplow [2008] show that optimal levels of income tax can be higher, the same or lower for households that derive more utility from various goods, depending on the nature of preference differences when these are observable, when they are not all policy rules can change. Benabou [2002] studies the effects of progressive income taxes and education financing in a dynamic economy with heterogeneous agents, and shows that these redistributive policies distort labor supply and savings, but also act as partial substitutes for missing credit and insurance markets.…”

“…There is a large body of work on tax policy and corruption, including the following Němec et al [2021], Jappelli and Pistaferri [2014], Huynh and Nguyen [2020], Marjit et al [2000], Kaplow [2008], Rosid et al [2019], Rosid et al [2018], Bird et al [2008], Aghion et al [2016], Belitski et al [2016], Asher [2008] and Ivanyna et al [2000]. Němec et al [2021] investigate the impact of corruption on underground economic activity.…”

Pro-rich Inflation and Optimal Income Taxation

“…This is not the case in our results. Kaplow (2008) suggests that negative subsistence levels can be thought of as endowments, although it is typical to assume that these levels are greater than zero in Stone-Geary preferences. We prefer to keep negative γ g values in our main specification and stick with the subsistence level interpretation.…”

“…Rowe and Woolley (1999) provide an example with four agents. Kaplow (2008) considers heterogeneity in many dimensions as well as subsistence levels. Judd et al (2018) simulate optimal income tax schedules with households that differ with respect to up to five characteristics, including basic needs (subsistence levels).…”

Tributación como campo amplio y recurrente de investigación

“…El mercado laboral, el ingreso de las personas y la distribución de la renta son cuestiones centrales para determinar el nivel de impuestos óptimos que una política debería implementar. Es importante destacar que la literatura es recurrente en abordar la importancia de encontrar este óptimo, considerando diferentes factores como la concavidad de la función de bienestar social colectivo y el nivel de habilidad de los individuos bien sea por separado (Kaplow, 2008;Blomquist & Christiansen, 2008) o mediante un tratamiento conjunto (Golosov, Troshkin, Tsyvinski, & Weinzierl, 2013).…”