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Optimal income taxation and social norms in the labor market

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  • Thomas Aronsson
  • Tomas Sjögren

Abstract

This paper concerns optimal income taxation in a two-type model extended to allow for social interaction and social norms in the labor market. One type of norm relates to the hours of work among the employed, and we assume that there is a cost associated with deviating from 'normal behavior' (defined in terms of the average hours of work). Another type of norm refers to the pressure of earning one's living by working, where social interaction means that the perceived cost of being out of employment depends on the share of nonworkers in the population. The results show how, and why, the existence of social norms may modify results derived in earlier literature. Under reasonable assumptions, the norm referring to normal behavior in term of work hours provides an incentive for the government to increase the hours of work supplied by the high-ability type relative to the hours of work supplied by the low-ability type, whereas the norm of 'earning one's living by working' strengthens the employment-motive behind tax policy.
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Suggested Citation

  • Thomas Aronsson & Tomas Sjögren, 2010. "Optimal income taxation and social norms in the labor market," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(1), pages 67-89, February.
    • Handle: RePEc:kap:itaxpf:v:17:y:2010:i:1:p:67-89
    DOI: 10.1007/s10797-008-9100-1
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    Cited by:

    1. Aronsson, Thomas & Johansson-Stenman, Olof, 2020. "Optimal Second-Best Taxation When Individuals Have Social Preferences," Umeå Economic Studies 973, Umeå University, Department of Economics.
    2. Robin Boadway & Nicolas-Guillaume Martineau, 2013. "Normative Analysis with Societal Constraints," CESifo Working Paper Series 4305, CESifo.
    3. Thomas Aronsson & James R. Walker, 2010. "Labor Supply, Tax Base and Public Policy in Sweden," NBER Chapters, in: Reforming the Welfare State: Recovery and Beyond in Sweden, pages 127-158, National Bureau of Economic Research, Inc.
    4. Luigi Bonatti, 2007. "Evolution of preferences and cross-country differences in time devoted to market work," Department of Economics Working Papers 0719, Department of Economics, University of Trento, Italia.
    5. Aronsson, Thomas & Granlund, David, 2013. "Gender Norms, Work Hours, and Corrective Taxation," HUI Working Papers 83, HUI Research.
    6. Ruggero Paladini, 2014. "Da Bentham alla tassazione ottimale," Public Finance Research Papers 2, Istituto di Economia e Finanza, DSGE, Sapienza University of Rome.
    7. Aronsson, Thomas & Granlund, David, 2015. "Gender norms, work hours, and corrective taxation," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 56(C), pages 33-39.
    8. Thomas Aronsson & Olof Johansson‐Stenman, 2013. "Conspicuous Leisure: Optimal Income Taxation When Both Relative Consumption and Relative Leisure Matter," Scandinavian Journal of Economics, Wiley Blackwell, vol. 115(1), pages 155-175, January.
    9. Thomas Eichner & Daniel Weinreich, 2015. "Welfare stigma and risk taking in the welfare state," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 44(2), pages 319-348, February.
    10. Bonatti, Luigi, 2008. "Evolution of preferences and cross-country differences in time devoted to market work," Labour Economics, Elsevier, vol. 15(6), pages 1341-1365, December.
    11. Boadway,Robin & Cuff,Katherine, 2022. "Tax Policy," Cambridge Books, Cambridge University Press, number 9781108949453, September.

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    More about this item

    Keywords

    Optimal taxation; Redistribution; Social interaction; Norms; D60; H21; H53;
    All these keywords.

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs

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