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Optimal Taxation and Other-Regarding Preferences

Author

Listed:
  • Thomas Aronsson

    (University of Umea, Sweden and University of Graz, Austria)

  • Olof Johansson-Stenman

    (University of Gothenburg, Sweden)

Abstract

We analyze optimal redistributive income taxation within a Mirrleesian framework that incorporates other-regarding preferences, examining both a general model and four specific cases. Two of these reflect self-centered inequality aversion, based on models by Fehr & Schmidt and Bolton & Ockenfels, respectively, while the other two reflect non-self-centered inequality aversion, where individuals prefer a low Gini coefficient and a high minimum disposable income. We find that other-regarding preferences can substantially increase the income tax rates, including top income tax rates, and enhance the overall redistribution. Furthermore, different types of other-regarding preferences have markedly different implications for optimal taxation.

Suggested Citation

  • Thomas Aronsson & Olof Johansson-Stenman, 2024. "Optimal Taxation and Other-Regarding Preferences," Graz Economics Papers 2024-22, University of Graz, Department of Economics.
    • Handle: RePEc:grz:wpaper:2024-22
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    More about this item

    Keywords

    Optimal Taxation; Redistribution; Social Preferences; Inequality Aversion.;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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