Working Paper: NBER ID: w17784
Authors: Benjamin B. Lockwood; Matthew C. Weinzierl
Abstract: The prominent but unproven intuition that preference heterogeneity reduces re-distribution in a standard optimal tax model is shown to hold under the plausible condition that the distribution of preferences for consumption relative to leisure rises, in terms of first-order stochastic dominance, with income. Given mainstream functional form assumptions on utility and the distributions of ability and preferences, a simple statistic for the effect of preference heterogeneity on marginal tax rates is derived. Numerical simulations and suggestive empirical evidence demonstrate the link between this potentially measurable statistic and the quantitative implications of preference heterogeneity for policy.
Keywords: Optimal Taxation; Preference Heterogeneity; Redistribution
JEL Codes: H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| preference heterogeneity (D11) | optimal redistribution (H21) |
| distribution of relative preference for consumption over leisure rises with income (D11) | optimal redistribution (H21) |
| income variation attributed to both preferences and ability (D31) | overestimation of high earners' abilities (D29) |
| attributing all income to ability (D31) | too small a degree of optimal redistribution (D39) |
| preference heterogeneity (D11) | optimal marginal tax rates (H21) |
| Mirrleesian benchmark (E19) | optimal marginal tax rates (H21) |