Aspirations and Optimal Taxation: Lump-Sum and Proportional Taxes
18 Pages Posted: 18 Jun 2018
Date Written: June 3, 2018
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: Suggested Citation