Working Paper: NBER ID: w17755
Authors: Charles F. Manski
Abstract: The merits of alternative income tax policies depend on the population distribution of preferences for income, leisure, and public goods. Standard theory, which supposes that persons want more income and more leisure, does not predict how they resolve the tension between these desires. Empirical studies of labor supply have been numerous but have not shed much light on the matter. A persistent problem is that empirical researchers have imposed strong preference assumptions that lack foundation. This paper examines anew the problem of inference on preferences and considers the implications for comparison of tax policies. I first perform a basic revealed-preference analysis that imposes no assumptions on the preference distribution beyond the presumption that persons prefer more income and leisure. This shows that observation of a person's labor supply under a status quo tax policy may bound his labor supply under a proposed policy or may have no implications, depending on the shapes of the two tax schedules and the location of status quo labor supply. I next explore the identifying power of two assumptions restricting the population distribution of income-leisure preferences. One assumes that groups of persons who face different choice sets have the same distribution of preferences, while the other adds restrictions on the shape of this distribution. I then address utilitarian policy comparison with partial knowledge of preferences. Partial knowledge of preferences implies partial knowledge of the welfare function. Hence, it may not be possible to rank policies.
Keywords: income tax policy; preferences; labor supply; revealed preference analysis
JEL Codes: C14; C25; H21; H24; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Observation of a person's labor supply under a status quo tax policy (H31) | Bounds their labor supply under a proposed policy (J48) |
| Heterogeneity of responses to taxation (H29) | Complicates identification of preferences (D91) |
| Lack of credible understanding of preferences (D81) | Challenges evaluation of welfare implications of different tax policies (H31) |
| Rich data (Y10) | Improve knowledge of preferences (D11) |