Abstract
We assume that taxpayers are loss averse in reference to other taxpayers’ consumption. Loss aversion implies that labor supply responses to taxation depend on the taxpayer's position in the income distribution. Consistent with empirical evidence, we find the steeper the ascent on the curve of income distribution, the smaller the labor supply elasticity. In the standard problem of optimal income taxation, the role of income distribution is to aggregate the labor supply effects of taxation. We show that loss aversion can offset the aggregation role of income distribution resulting in a greater role for social concerns.
Original language | English |
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Pages (from-to) | 579-598 |
Number of pages | 20 |
Journal | The Scandinavian Journal of Economics |
Volume | 124 |
Issue number | 2 |
Early online date | 10 Nov 2021 |
DOIs | |
Publication status | Published - 30 Apr 2022 |
Keywords
- Income taxation
- labor supply
- loss aversion
- reference dependence
- social welfare
ASJC Scopus subject areas
- Economics and Econometrics