Social Versus Individual Work Preferences: Implications for Optimal Income Taxation
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Summary:
The benchmark optimal income taxation model of Mirrlees (1971) finds that the optimal marginal income tax rate (MIT) is always non-negative. A key model assumption is the coincidence between social and individual work preferences. This paper extends the model to allow for differences in social and individual work preferences. The theoretical and simulation analyses show that under this model, when the government places a higher social weight on work than individuals, the optimal MIT schedule is shifted downwards, introducing the possibility for optimal wage subsidies at the bottom of the income distribution. This implies lower revenues, demogrants, and overall progressivity.
Series:
Working Paper No. 2022/062
Subject:
Employment subsidies Income Income tax systems Labor Labor supply Marginal effective tax rate National accounts Tax policy Taxes
Frequency:
regular
English
Publication Date:
March 25, 2022
ISBN/ISSN:
9798400204036/1018-5941
Stock No:
WPIEA2022062
Pages:
28
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