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Social Versus Individual Work Preferences: Implications for Optimal Income Taxation

Author

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  • Zhiyong An
  • Mr. David Coady

Abstract

The benchmark optimal income taxation model of Mirrlees (1971) finds that the optimal marginal income tax rate (MIT) is always non-negative. A key model assumption is the coincidence between social and individual work preferences. This paper extends the model to allow for differences in social and individual work preferences. The theoretical and simulation analyses show that under this model, when the government places a higher social weight on work than individuals, the optimal MIT schedule is shifted downwards, introducing the possibility for optimal wage subsidies at the bottom of the income distribution. This implies lower revenues, demogrants, and overall progressivity.

Suggested Citation

  • Zhiyong An & Mr. David Coady, 2022. "Social Versus Individual Work Preferences: Implications for Optimal Income Taxation," IMF Working Papers 2022/062, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2022/062
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    Cited by:

    1. Zhiyong An, 2024. "A note on welfarist versus non-welfarist social welfare function," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(4), pages 1066-1073, August.
    2. Zhiyong An, 2023. "On the marginal cost of public funds: the implications of charitable giving and warm glow," Fiscal Studies, John Wiley & Sons, vol. 44(3), pages 299-307, September.

    More about this item

    Keywords

    Preference Differences; Optimal Income Taxation; Wage Subsidies; Progressivity; taxation model; preference difference; model of Mirrlees; income taxation; MIT schedule; Marginal effective tax rate; Income tax systems; Income; Labor supply; Employment subsidies;
    All these keywords.

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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