Aspirations and Optimal Taxation: Lump-Sum and Proportional Taxes

18 Pages Posted: 18 Jun 2018

See all articles by Matthias Weber

Matthias Weber

University of St. Gallen - School of Finance; Vilnius University

Date Written: June 3, 2018

Abstract

I provide a simple two-period model comparing lump-sum taxes with proportional labor taxes. The difference to the classical optimal taxation literature is that I introduce a behavioral twist according to which people’s aspirations change from one period to another as suggested by empirical evidence. It turns out that the policy implication from this model can differ significantly from the one assuming full rationality. In the behavioral model, a lump-sum tax is much less attractive. This paper does not aim at providing a full-fledged quantitative model, it should rather be seen as a cautionary tale about the robustness of classical optimal taxation results when deviating from full rationality.

Keywords: Behavioral Public Finance; Behavioral Optimal Taxation; Aspirations; Easterlin Paradoxon

JEL Classification: H21, D90, D60, H20

Suggested Citation

Weber, Matthias, Aspirations and Optimal Taxation: Lump-Sum and Proportional Taxes (June 3, 2018). Available at SSRN: https://ssrn.com/abstract=3189728 or http://dx.doi.org/10.2139/ssrn.3189728

Matthias Weber (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Vilnius University ( email )

Sauletekio ave. 11, Vilnius
Vilnius
Lithuania

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