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Social Versus Individual Work Preferences: Implications for Optimal Income Taxation
Author:
Zhiyong An
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Mr. David Coady
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Series:
IMF Working Papers
Volume/Issue:
Volume 2022: Issue 062
Language:
English
Publication Date:
25 Mar 2022
DOI:
https://doi.org/10.5089/9798400204036.001
ISBN:
9798400204036
ISSN:
1018-5941
Pages:
28
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
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2022: Issue 062