Social Versus Individual Work Preferences: Implications for Optimal Income Taxation

March 25, 2022

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Format: Chicago

Zhiyong An, and David Coady. Social Versus Individual Work Preferences: Implications for Optimal Income Taxation, (USA: International Monetary Fund, 2022) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Employment subsidies, Income, Income tax systems, Labor, Labor supply, Marginal effective tax rate, National accounts, Tax policy, Taxes

Keywords: Employment subsidies, Income, Income tax systems, Income taxation, Labor supply, Marginal effective tax rate, MIT schedule, Model of Mirrlees, Optimal Income Taxation, Preference difference, Preference Differences, Progressivity, Taxation model, Wage Subsidies

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/062
Stock No:

WPIEA2022062
ISBN:

9798400204036
ISSN:

1018-5941

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