Loss aversion, labor supply, and income taxation

Research output: Contribution to journalArticlepeer-review

Abstract

We assume 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 income distribution. Consistent with empirical evidence, we find the steeper the ascend 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 languageEnglish
Pages (from-to)579-598
JournalThe Scandinavian Journal of Economics
Volume124
Issue number2
Early online date10 Nov 2021
DOIs
Publication statusPublished - 30 Apr 2022

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