Abstract

http://ssrn.com/abstract=2087560
 


 



Adaptation, Anticipation-Bias and Optimal Income Taxation


Thomas Aronsson


University of Umea - Department of Economics; Uppsala University

Ronnie Schöb


Freie Universitaet Berlin; CESifo (Center for Economic Studies and Ifo Institute)

June 19, 2012

CESifo Working Paper Series No. 3840

Abstract:     
Adaptation is omnipresent but people systematically fail to correctly anticipate the degree to which they adapt. This leads individuals to make inefficient intertemporal decisions. This paper concerns optimal income taxation to correct for such anticipation-biases in a framework where consumers adapt to earlier consumption levels through a habit-formation process. The analysis is based on a general equilibrium OLG model with endogenous labor supply and savings where each consumer lives for three periods. Our results show how a paternalistic government may correct for the effects of anticipation-bias through a combination of time-variant marginal labor income taxes and savings subsidies. Furthermore, the optimal policy mix remains the same, irrespective of whether consumers commit to their original life-time plan for work hours and savings decided upon in the first period of life or re-optimize later on when realizing the failure to adapt.

Number of Pages in PDF File: 27

Keywords: optimal taxation, adaptation, habit-formation, anticipation-bias, paternalism

JEL Classification: D030, D610, D910, H210

working papers series





Download This Paper

Date posted: June 19, 2012  

Suggested Citation

Aronsson, Thomas and Schöb, Ronnie, Adaptation, Anticipation-Bias and Optimal Income Taxation (June 19, 2012). CESifo Working Paper Series No. 3840. Available at SSRN: http://ssrn.com/abstract=2087560

Contact Information

Thomas Aronsson
University of Umea - Department of Economics ( email )
Umeå University
Umea, SE - 90187
Sweden
Uppsala University
Box 513
Uppsala, 751 20
Sweden
Ronnie Schöb (Contact Author)
Freie Universitaet Berlin ( email )
Kaiserswerther Str. 16-18
Berlin, Berlin 14195
Germany
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Feedback to SSRN


Paper statistics
Abstract Views: 215
Downloads: 11

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo3 in 0.375 seconds