Optimal Redistribution with Heterogeneous Preferences for Leisure

Abstract

This paper examines the properties of the optimal nonlinear income tax when preferences are quasi-linear in leisure and individuals differ in their ability and their preferences for leisure. The government seeks to redistribute income. It can perfectly observe the level of endogenous income but cannot observe either ability or preferences. The heterogeneity of preferences leads to problems of comparability between individual utilities which challenge the design of redistributive schemes. 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 quasi-linearity 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. Copyright Blackwell Publishing, Inc. 2002.

Negative Marginal Tax Rates and Heterogeneity

“…The importance of this observation for policy was pointed out in Cu (2000), who is the rst to explicitly link social weights to the opportunity cost of work, using alternative choices of cardinal utilities. In a model with four types, combining two values for productivity and two values for the cost of work, Boadway, Marchand, Pestieau, and Racionero (2002) showed how it can be optimal to have binding upward incentive constraints when high opportunity costs are associated with small social weights.…”

“…The intuition, largely taken from Boadway, Marchand, Pestieau, and Racionero (2002), is as follows. There is no distortion at α, and the incentive constraints are not binding when R = 1, i.e.…”

Optimal Policy with Heterogeneous Preferences

“…In addition, it is hard to interpret their simulation results regarding differences in optimal redistribution in the presence of heterogeneity because the means of the parameters in their two-dimensional case differ, often significantly, from the values in their one-dimensional case. Boadway et al (2002) focus on which self-selection constraints are binding in a model in which preferences are of two types, and Cremer et al (2001) discuss modifications to the Atkinson and Stiglitz (1976) result when individuals differ in unobservable endowments.…”

Unemployment Benefits and Optimal Non-Linear Income Taxation

“…Extensions have been made in many directions, ranging from heterogeneous preferences for leisure (Boadway et al, 2001) to the inclusion of commodity taxation (Edwards et al, 1994). However, papers that introduce unemployment into the model are very hard to come by.…”