Social Versus Individual Work Preferences: Implications for Optimal Income Taxation
IMF Working Papers, March 25, 2022
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- Social Versus Individual Work Preferences: Implications for Optimal Income Taxation
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Bibliographic details
- Authors: Zhiyong An, David Coady
- Published: March 25, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400204036.001
Overview
- Title: Social Versus Individual Work Preferences: Implications for Optimal Income Taxation
- Authors: Zhiyong An, David Coady
- Date: March 25, 2022
- Publication: IMF Working Papers, Working Paper No. 2022/062, Issue: 062, Volume: 2022
- Pages: 28
- DOI: https://doi.org/10.5089/9798400204036.001
- ISBN: 9798400204036
- ISSN: 1018-5941
Research question and model extension
- Extends the benchmark optimal income taxation model of Mirrlees (1971) by allowing for differences between social and individual work preferences.
- Highlights that a key assumption of the Mirrlees model is the coincidence between social and individual work preferences; the paper relaxes this assumption.
Core theoretical result
- When the government places a higher social weight on work than individuals, the optimal marginal income tax rate (MIT) schedule is shifted downwards.
- This shift introduces the possibility for optimal wage subsidies at the bottom of the income distribution.
- The paper contrasts with the Mirrlees (1971) finding that the optimal MIT is always non-negative.
Quantitative and simulation implications (as presented)
- Under the extended model:
- Revenues are lower.
- Demogrants are lower.
- Overall progressivity is lower.
- Theoretical and simulation analyses support these results.
Policy implications
- Policymakers who assign higher social value to work relative to individuals might optimally adopt:
- Lower MIT schedules overall.
- Targeted wage subsidies at the bottom of the income distribution.
- Such policies imply trade-offs involving:
- Reduced tax revenues.
- Smaller direct demogrants.
- Reduced measured progressivity of the tax-transfer system.
Subjects and keywords (as listed)
- Subjects: 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
Source: IMF Working Paper "Social Versus Individual Work Preferences: Implications for Optimal Income Taxation", Zhiyong An and David Coady, March 25, 2022; Working Paper No. 2022/062; DOI: https://doi.org/10.5089/9798400204036.001
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